REDUCING SPENDING AND INCREASING EQUITY - HOW FAR CAN REFUNDABLE TAX CREDITS TAKE US

The social security review now underway is intended to restructure Can ada's social safety net. The principle of universality is likely to be replaced by income-conditioned transfers with improved work incentive s. At the same time, the notion of a refundable tax credit lurks in th e background, a legacy of the first social security review held in the 1970s. Our paper examines the rationale behind the income-testing pri nciple, the structure of refundable tax credit plans and their relatio nship to income inequality in Canada. More specifically, a number of d ifferently configured refundable tax credit options are simulated usin g Canadian household micro-data to evaluate the budgetary costs, the i mplied average tax rate required to finance the program and the result ing degree of inequality. We demonstrate the possibility of cutting go vernment spending while simultaneously reducing income inequality in C anada.