OAP: Childhood Budgets and the Returning to Work Tax.

The combination of the Childhood Budget and the income test in the new Ontario Autism Program has all kinds of unintended consequences, including marriage penalties. I wrote about a few of them here: Why the OAP income testing formula stinks.

One big consequence I haven’t written about is that it creates huge penalties for parents, particularly moms, of re-entering the workforce when their child is young. (Dads too, but at the risk of being accused of being traditional and/or heteronormative, this is primarily going to affect moms).

To understand why, we need to understand how the income test for the Childhood Budget works. Roughly speaking, for family incomes between $55,000 and $220,000, for every extra $3,000 a family makes, their Childhood Budget is reduced by 1.5% of the maximum.

For a child 2-and-under, the maximum is $140,000. So for every extra $3,000 a family earns, their Childhood Budget is reduced by $2,100. ($140,000 * 1.5%). That’s effectively a clawback rate of 70%!

In other words, if Mom goes back to work and earns $50,000, her child’s lifetime Childhood Budget is reduced by 70%, or $35,000. That’s one heck of a disincentive to return back to work!

Of course, that’s not a direct apples-to-apples comparison, since we’re comparing a yearly income to a lifetime Childhood Budget. So let’s make it apples-to-apples. Thanks to the 20% rule, we know that a family can spend 20% of a remaining Childhood Budget in one year. So a $35,000 reduction in a Childhood Budget means that the family has $7,000 less to spend in therapy during that year ($35,000 * 20%). So the effective tax rate is 14% ($7,000/$50,000).

14% may not sound like a lot, but that’s on top of all the other income and payroll taxes (EI, CPP, etc.) that parent must pay. Thanks to some excellent work at the C.D. Howe Institute, we already know that moms already face punishingly high marginal effective tax rates (I recommend this Financial Post article explaining the research). Now the Ontario government is adding an additional 14% to this burden. I can’t figure out how any conservative could possibly support such a hike in marginal effective tax rates.