The Impact of Canada s Family Caregiver Amount Tax Credit in Ontario By Ben Segel-Brown

Transcription

1 The Impact of Canada s Family Caregiver Amount Tax Credit in Ontario By Ben Segel-Brown A research report submitted in fulfillment of the requirements for PAPM4908 as credit towards the degree of Bachelor of Public Affairs and Policy Management [Honours] Arthur Kroeger College of Public Affairs Carleton University Ottawa, Ontario

2 Abstract This paper looks at the impact of the recently introduced Family Caregiver Amount Tax Credit on care givers in Ontario. It builds a micro-economic model of the decision to provide care at home or in an institution (nursing home) and analyses data from the General Social Survey, Cycle 16, 2002 [Canada]: Ageing and Social Support. It finds that the tax credit should create efficiency and equity gains, but it is unlikely to have a substantial impact given its small size. Its findings suggest that the Family Caregiver Amount Tax Credit should be made refundable and substantially increased in size.

3 Acknowledgements Firstly, I would like to thank my supervisor, Åke Blomqvist for his time, his guidance and his support for introducing me to research and writing in the field of health economics. I would also like to thank thoughtful reviewers of this document who provided valuable substantive feedback. I would also like to thank my parents for their ongoing encouragement and support.

4 Table of Contents Introduction... 1 Exposition... 4 Literature Review Theoretical Framework Data Analysis Conclusion Works Consulted... 55

5 1 Introduction This report provides an economic analysis of the impacts of Canada s Family Caregiver Amount Tax Credit introduced by the Harper Government for the 2012 tax year, which reduces the taxes of those who provide care for a dependant elderly person in their home. This report focuses on three aspects of the impact of the credit: efficiency, equity, and effectiveness. This paper shows that the Family Caregiver Amount Tax Credit could theoretically lead to efficiency gains (i.e., it could make families better off at lower cost), but is unlikely to be effective (i.e., its size is not substantial relative to the costs of longterm care). The data analysis suggests that the credit is regressive at lower incomes (i.e. below $15,000) but progressive beyond the point at which positive taxes are owed. The paper has four main sections: an exposition, a literature review, a theoretical model and a data analysis. Each of these sections contributes to an understanding of the efficiency, equity, and effectiveness of the tax credit. The potential efficiency gains associated with the credit are demonstrated through a graphical analysis of the theoretical model, which shows that the tax credit could reduce the market distortion created by government provision of institutional care, and therefore create efficient substitution of home care for institutional care. However, this report also shows that these efficiency gains may be partially off-set by the inefficiencies resulting from the federal subsidization of home care through the Medical Expenditures Tax Credit and provincial provision of home care. The equity impacts of the Family Caregiver Amount Tax Credit are revealed though the exposition and data analysis. The exposition shows that the tax is regressive (i.e., it

6 2 provides greater tax relief to high income persons as a portion of their income) up until the point where positive taxes are paid, but is progressive beyond that point. Likewise, the data analysis suggests that there are substantially higher rates of care provision above the point at which positive taxes are owed compared with below it, but that beyond this point care provision declines with income. This indicates that the tax credit is regressive up until the point at which positive taxes (more precisely $300 in taxes) are owed as in this range higher income individuals receive larger tax credits and lower income individuals are less likely to be providing care. However, beyond that point the tax credit is progressive as the credit is an increasingly small amount of higher income families incomes and rates of care provision decline with income. Because those with dependant relatives have a greater need for income, it is debatable whether these higher income families with relatives to care for actually have a greater ability to pay taxes, so the tax credit, while regressive, may still be equitable. This paper also explores how effective the Family Caregiver Amount Tax Credit is likely to be in achieving efficiency gains (i.e., substitution of home care for institutional care) and equity gains (i.e., addressing disparities in ability to pay taxes at a particular income level related to care responsibilities). The exposition shows that the value of the credit to the caregiver ($300 on top of an existing $660.30) is not substantial compared to the costs of providing care, so little gains in efficiency or equity are likely to be achieved. The literature review provides several measures of the benefits and costs of long-term care, including impact on family income, impact on quality of life, and willingness to pay. The impact of intensive personal care responsibilities (90+ minutes per day) on income and quality of life measures is modeled as part of the data analysis. It was hoped that this would

7 3 provide some indication of the magnitude of the burden of care, and consequently the degree to which the credit was compensating for that burden. However, the analysis shows intensive care givers find life only slightly more stressful, and being a care provider was not significantly related to life satisfaction, EI income, or health. The highest rates of care provision were in the personal income brackets slightly below the Canadian average, but it was not possible to determine to what degree this higher rate of care provision is a result of a lower opportunity cost of their time as opposed to lost income resulting from providing care. As a result no estimate of the financial burden of care in terms of lost income can be made. Rates of care provision did not change dramatically between middle and higher income respondents, see Household Income Distribution and Profile of Care Providers in Table 1G. These results did not provide a means of creating a reliable estimate of the size of the Tax Credit that would be needed to fully compensate intensive care givers for the burden of care, which would in turn provide an indication of the degree to which the credit is effective in compensating for that burden. The literature review also explores the substitutability of outside care, care by relatives and care in institutions, finding variable substitutability depending on medical condition. This is relevant because, regardless of value, the tax credit will only be effective in creating substitution of home care for institutional care if it is actually practical for families to do so.

8 4 Exposition Importance of Topic This research is timely because the Government of Ontario is facing a shortage of places in Long-Term Care homes and at the same time pressures to reduce its deficit. With an aging population and growing debt, both of these problems can be expected to worsen in the coming decades, with Statistics Canada projecting that the number of dependent seniors will triple over the next 50 years (Grignon & Bernier, 2012). A federal subsidy compensating care givers of the elderly may offer a solution to these problems by diverting demand away from publicly funded institutions (hospitals and nursing homes). Defining Long-Term Care Recipients By definition, those with long-term care needs require assistance with the instrumental or basic activities of living (Grignon & Bernier, 2012, p. 4). To illustrate, eating is a basic activity of living, and grocery shopping is an activity instrumental to eating. An elderly person who needs help eating or shopping would be considered to have a long-term care need. Long-term care is differentiated from acute or rehabilitation care in that it is expected that care will be required for an extended period of time, often the remainder of the patient s life. This report distinguishes between long-term care in institutions (nursing homes) and home care that takes place in the caregiver or recipient s home. Home care can be provided free of charge by friends and family, or by paid outsiders (Grignon & Bernier, 2012, p. 5). The focus in this paper is on care recipients with severe needs, such that they are eligible for care in an institution but could still be cared for in a caregiver s home with assistance. The data analysis section of this paper focuses on those

9 5 providing intensive (90+ minutes per day) personal care (bathing, toileting, care of toenails/fingernails, brushing teeth, shampooing and hair care or dressing). The focus is on personal care activities because these were most closely associated with providing care in the home (as opposed to helping with shopping or to pay the bills) and the threshold of 90 minutes per day was chosen as an indicator of the level of need that would be needed to qualify for a space in a nursing home. This threshold was validated by comparing the portion of care providers above and below the intensity who believed the government would take over if they were unable to continue providing care; those providing more than 90 minutes of care per day were almost five times as likely to believe the government would take over if they were unable to continue providing care compared with those providing 30 to 89 minutes per day (Table 4b). Government Subsidies This section outlines the current system of subsidies and the new Family Caregiver Amount Tax Credit, the incremental impact of which will be the focus of this report. The subsidy system described here is that of Ontario, Canada. Long-term care, both in institutions (nursing homes) and in home care, is a peculiar part of Canada s health care system in that it is not covered by the Canada Health Act (Health Canada, 2004). As a result, it is not subject to the strict requirements of universal public coverage that apply to other aspects of health care, enabling funding mechanisms that include private financing. In Ontario, the provincial government funds long-term care and outsider home care, while the federal government provides tax credit for those who directly provide or pay for the care of an elderly dependant in their home and to offset the costs of home care.

10 6 In Ontario, the medical and personal services provided in institutions (long-term care/nursing homes) are fully funded by the Ontario government, which provides homes with $ per day for each resident in their care, adjusted for the needs of the home s resident mix. In addition there are a variety of funding envelopes for particular purposes such as for the payment of registered practical nurses. Accommodation and food charges for long-term care are $55.04 per day for a basic bed and more for private and semi-private rooms, but low income seniors who cannot afford this per diem can apply for a rate reduction that leaves them with a $132 per month comfort allowance (Ontario Ministry of Health and Long-Term Care, 2012). In order to enter a long-term care home, seniors must be assessed by Community Care Access Centres which will determine their eligibility and will place them on a waiting list (Ontario Ministry of Health and Long-Term Care, 2012). There are currently 19,000 eligible seniors in Ontario who are on the waiting list, so this waiting list is a substantial rationing mechanism (Ontario Association of Non-Profit Homes and Services for Seniors, 2013). This waitlist is likely inefficient as the per diem cost of care in a hospital bed for an Alternative Level of Care (ALC) patient, i.e., a patient in a hospital who could be cared for in a long-term care institution, is more than five times higher, at $842/day, and many persons on the waiting list end up as ALC patients in acutecare hospitals (Ontario Home Care Association, 2012). There are also a variety of services available to assist seniors in their home. In Ontario, these services are delivered by family and friends, volunteers, provider organizations, commercial retailers, and community centers. These care providers are funded by the government, donations to voluntary organizations, private insurance plans, or the individual (Ontario Ministry of Health and Long-Term Care, 2012). This report only

11 7 distinguishes between the two most common types of home care: paid outsider home care, and unpaid care by family members. A limited amount of outsider home care is publicly provided by the province. Medical expenditures for infirm dependants (including expenditures on home care services) are subsidised through a federal Medical Expense Tax Credit (Canada Revenue Agency, 2013). Family members who are providing care do not receive any subsidy except through the non-refundable tax credit discussed below, which does not depend on the hours of care provided. Between 66% and 84% of seniors primarily receive care informally from friends and family free of charge (Grignon & Bernier, 2012). For the 2012 tax year, the Harper government introduced a non-refundable Family Caregiver Amount Tax Credit at the federal level. The impact of the introduction of this tax credit is the focus of this paper. A tax credit is an amount deducted from your taxes owing. Tax credits are multiplied by 15% (the lowest income bracket s tax rate) and this is the amount deducted from taxes owing. A non-refundable tax credit is a tax credit for which you will not get a refund from the governement if your tax credits exceed your taxes owing (Canada Revenue Agency, 2013). The Family Caregiver Amount Tax Credit is $2000 (a $300 reduction in taxes), on top of an existing Amount for infirm dependants age 18 or older of $4,402 (a $ reduction in taxes) for those who provide care for a low-income relative in their home due to a physical or mental condition (Intuit, 2013). Because the credit is for a fixed amount and is non-refundable, the tax is regressive up to the point

12 8 where the full value of the credit can be claimed and constant beyond that point as shown in Figure 1: 1 Figure 1: Absolute Value of Family Caregiver Amount Tax Credit The term regressive tax credit has rarely been used in economic literature. A regressive tax is one that takes a larger amount, as a percentage of total income, from lowincome people than from high-income people. This can occur at the individual level; for instance, a flat tax that took the same amount of money from all people would take a larger amount from the poor as a portion of their income. It can also occur due to aggregate patters of consumption where lower income people spend a larger portion of their income on a taxed good, such as cigarettes, than higher income individuals. In addition, a tax can be more or less regressive due to the behavior response to taxation, for instance cigarette taxes are slightly less regressive than they would otherwise be because the poor have a 1 Note that the value at which the Family Caregiver Amount Tax credit becomes useful depends on the other deductions and credits available, the threshold of $14,000 used here is the approximate sum of the personal amount and the existing tax credit for care givers.

13 9 more elastic demand for cigarettes their consumption and therefore tax burden decrease more in response to an equal increase in tax (Remler, 2004). It follows that a regressive tax credit is one that reduces the taxes, as a percentage of total income, of higher income individuals more than that of lower income individuals. An example of this is the income tax deduction for federal taxes paid that exists in several US states, which greatly benefits the rich because they both have a larger deduction (because they pay federal taxes on a larger income at a higher rate) and get a larger reduction in taxes owing, as a result of a given deduction (because their remaining income is taxed at a higher rate) (Citizens for Tax Justice, 2009). Figure 2 shows that, as a portion of the income of a care provider, the tax credit is regressive up to the threshold at which positive taxes of $300 would otherwise be owed (around $16,000 with only the Basic Personal Amount and the existing Caregiver Amount). Whether the tax credit is considered progressive or regressive beyond this point depends on the point of comparison. The tax credit will always be worth more (as a percentage of income) to those with higher incomes than it is for those who do not owe positive taxes (for whom it was worth nothing), but its value as a percentage of income does substantially decline with increasing income meaning it is technically progressive in this range. Figure 2 does not capture the differential tax impacts arising from the higher rate of care provision of lower income individuals still owing positive taxes. Note also that, the value technically depends on the income of the higher wage earner in a family with pooled resource, but this does not greatly affect the conclusions here given the very strong relationship between personal and family income.

14 10 Figure 2: The value of the Family Caregiver Amount Tax Credit as a Percentage of Personal Income. The non-refundable Family Caregiver Amount Tax Credit introduced for the 2012 tax year is likely to have a negligible impact in terms of substitution between institutional and home care as a $2000 tax credit ($300 per year) is not a meaningful amount relative to the costs and burdens of providing long-term care. For example, the public subsidy for each nursing home patient is about $54,000 per year over and above the private cost of around $20,000 per year (Ontario Ministry of Health and Long-Term Care, 2012). Another problem is that the tax credit is non-refundable, meaning that it is only deducted from taxes owing and not reimbursed to low income individuals whose credits exceed their taxes owing. As a result it will only influence the decisions of individuals in families with an individual who currently pays positive taxes. Further, if the family does not pool resources, it is possible the care decision maker will not receive much benefit from the tax credit (for

15 11 instance if their spouse counts it against their taxes owing and keeps the savings in a private account spent for their own benefit). If the tax credit was made refundable, it would impose no additional burden on families to require the credit be claimed by the caregiver, ensuring it influences their decision. Research Question This report asks: Is the Family Caregiver Amount Tax Credit efficient (in the sense of reducing costs to government while improving quality of care) equitable (in the sense of redistributing the tax burden away from those with less ability to pay) and effective (in the sense of creating substantial substitution from institutional to home care or compensating care givers for the burden of care)? This reflects my interpretation of the two potential microeconomic 2 purposes of the tax credit, to relieve the burden on institutional care settings, and to help relieve the burden of care. This paper suggests that there are potential efficiency improvements associated with the tax credit and that it is progressive, although not necessarily inequitable. However, the small size of the credit means it is essentially meaningless in the scale of decisions involving care for the elderly. This section more explicitly defines efficiency, equity, and effectiveness. It also outlines the results I expected my analysis to produce, i.e., the initial hypotheses. Efficiency Proposition Efficiency improvements are a micro-economic concept that refers to a net utility gain, i.e., a situation where the benefits to all actors outweigh the costs of a policy option. 2 The credit was introduced as part of Canada s Economic Action Plan suggesting it was intended to serve the macro-economic purpose of promoting growth, but this doesn t make much sense given we are no longer in a recession. I also exclude rationales rooted in the potential political advantage to be gained. The assigning of the name Family Caregiver Amount Tax Credit to what is effectively an increase in the Amount for infirm dependents age 18 or older was almost certainly done for the political reasons of being able to attract publicity and gain political advantage.

16 12 In this case, I expected to find that the elderly are happier and less expensive to care for when cared for in a relative s home (as opposed to an institution), but the caregiver bears greater private costs when providing care in the home. Given the existing market distortions, including free rationed institutional care and limited public funding of outsider home care, this paper s theoretical analysis (presented later) supports the claim that the tax credit could result in an efficiency improvement, although this benefit may be partially offset by the existence of inefficiency in the home care market. Equity Proposition I had also expected that the credit would be equitable in the sense of having desirable distributional consequences. By equity, I refer to vertical equity, a principle that requires that individuals with a less ability to bear the tax burden should pay less. I expected the Tax Credit to have desirable consequences in terms of vertical equity, as I expected the policy to reduce the tax burden on the poor, women, and families with dependent elderly persons. A tax credit that provides greater benefits to the poor promotes vertical equity in that it provides an additional means of reducing the tax burden on those with the least ability to pay. In addition, I expected the poor to be more likely to substitute (and therefore benefit) as a result of the credit, as fixed sums (like the tax credit) are more significant incentives for them due to the diminishing marginal utility of consumption. I also expected that the policy would benefit women, who are generally thought to be disproportionally care givers for the elderly and care recipients in the home. Finally, I expected that the credit would promote vertical equity in that it would redistribute the tax burden away from those families with an elderly relative to care for, and thus less ability to pay, to families with a

17 13 greater ability to pay. The data analysis presented later shows that the tax credit is progressive above $15,000 in personal income and would disproportionately benefit women who are 4.5 times as likely to provide care (Table 4b). The general proof of utility gains resulting from insurance against risk (here the risk of an elderly relative needing care) could be applied to show the value of equity gains. Effectiveness Proposition By effectiveness, I refer to the degree to which the Family Caregiver Amount Tax Credit results in substitution leading to efficiency improvements or provides substantial compensation relative to the burden of care. With a value of $300, the Family Caregiver Amount Tax Credit is insubstantial relative to the cost to government and burden on care givers associated with long-term care. This is discussed in the graphical analysis and data analysis presented later in this report. Literature Review There have been cost-benefit or cost-effectiveness analyses of various programs related to long-term care including: leave to provide care for dying relatives (Negera, 2009), treatment of traumatic brain injury (Faul, 2007) and neonatal intensive care for premature infants (Walker, 1984). However, as one meta-analysis of economic studies on long-term care put it, Few studies attempt any evaluation and those that do use varied, inconsistent and controversial methodologies (Smith and Wright, 1994). This may be a result of the improbability of any government deciding to eliminate long-term care, moral objections to the likely conclusion under existing methodologies that long-term care is not worthwhile, or the plethora of theoretical and practical challenges involved in performing such an analysis, which are outlined in detail in the literature. Because this paper must draw

18 14 on a variety of research areas to address the aspects of its cost-benefit analysis, this review offers a broad overview of existing literature. There have been some limited applications of contingent valuation to estimate the marginal costs and benefits of home and institutional care for care givers and patients. Contingent valuation assigns a value to a service by directly asking people, in a survey, how much they would be willing to pay (WTP) to receive or not to have to provide it. Several studies have found that contingent valuation can be effectively applied, but there is substantial variation between individuals and studies result in estimates of marginal cost (WTP) from 9.52 euros, about $12 US, to $10.54 US per hour (denberg et al., 2005). Interestingly, this is slightly larger than the value of care to recipients. Another study put the marginal value at a less likely value of 0.38 or about $0.60 US per hour (Mentzakis, Ryan, & McNamee, 2011).. However, all these studies looked at the marginal impact of an increase or decrease in the number of hours of care provided, not the overall value of care. Further these studies do not capture the significant psychological cost to care givers or care recipients arising from their placement in a nursing home as opposed to receiving care at home (Abel, 1990). Other relevant empirical studies have taken approaches other than contingent valuation. For instance, Fevang et al. (2012) looked at labour force participation to show that, in the years prior to their parent s death, children are less likely to be employed (all other things being equal), with employment at 0.5 to 1% lower among sons and 4% lower among daughters. Dunham and Dietz (2003) additionally showed that in many cases women change jobs in order to receive the flexibility they need to take care of aging

19 15 relatives, suggesting that providing care impacts both quantity and productivity of employment. In terms of the substitutability of care by family for paid home care or institutional care, the results are mixed, suggesting that the substitutability of care depends on the care recipient s medical condition. Brach and Jette (1962) used multiple regression to identify the factors that lead individuals to enter long-term care and how differences between populations in home care and institutional care in terms of age, need for ambulatory aids, mental disorientation, and needs for assistance with the activities of daily living, may limit the substitutability of home care. Dunham and Dietz (2003) showed that informal care is an effective substitute for long-term care as long as the needs of the elderly are low and require unskilled care. Lee and Young-Sook (2012) confirmed this result finding high substitutability for diabetics and low substitutability for patients with high blood pressure and mental illness. This severity-dependant substitutability has been picked up in the theoretical models discussed below. Another approach to determining substitutability is to look at the skills required to perform the tasks currently being performed by paid outsiders. Unregistered workers, i.e., home care providers other than registered nurses, licensed practical nurses, or social workers, represented just over 75% of formal home care providers in 2001 (Grignon & Bernier, 2012). In a study in British Columbia, only 10% of outside home care providers were registered professionals (Grignon & Bernier, 2012). Consistent with this finding, 71.2% of care (by hour) funded by the government of Ontario was for personal support/homemaking, 24.8% for nursing and 3.9% for therapy providers (Ontario Home Care Association, 2012). This suggests that there is substantial substitutability of paid home

20 16 care for care by relatives because unregistered care providers do not have any specialized training and their work could be done by a physically able relative. Another approach to economic valuation is the discrete choice experiment methodology which imputes preferences by asking care providers and recipients to choose between two bundles of different types of care and money. Mentzakis et al. (2011) assessed care recipient and care provider preferences for combinations of different types of care and money. While formal care and informal care generally acted as substitutes, they found that formal care complements informal supervision, and argue this finding occurred because the close emotional relationship between care givers and receivers made it difficult for them to agree to substitute away from assisting with the activities of daily living. While complementary in terms of value, this suggests there is significant inefficiency associated with outsider home care in that it necessitates more supervisory work for family care givers, despite reducing other burdens. This finding of a complementary relationship might cause one to worry that removing the subsidy for home care (and thereby increasing its price) might decrease the amount of home care provided by family. However, this relationship only existed for supervision by family which does not directly contribute to care and not for other care activities like personal care by family. Thus, while supervision would be expected to decrease with an increase in the price of home care, there is no reason to believe this decreased supervision will negatively impact care recipients. Monetary incentives were also found to be significant for younger care givers, but not for older care givers. However, the external validity of these results is questionable as Mentzakis et al. s estimates of the value of care, about $0.60 US per hour, seems implausibly low. It also relied on a small sample with a low response rate.

21 17 There have also been a variety of attempts to address theoretical challenges in valuing long-term care and family decision making. Kuhn and Nuscheler (2011) developed a model of health care with two levels of care (high need and low need) and two settings (home and institution). Institutional care provides better health care, which creates greater utility gain for high needs than for low needs patients, but those in institutional care suffered a fixed disutility. This model showed that those with more severe needs will selfselect to receive long-term care in institutions. Their model further incorporates information asymmetries to conclude that care in institutions will be overprovided due to its informational superiority, i.e., because the government can easily tell care recipients actually need care. Alternately, Pestieau and Sato (2008) assumed complete information and looked at efficiency in the context of mixing provision of formal and informal care with different levels of child income. Rodrigues and Schmidt (2010) complement these mathematical models with a broader explanation of the rationale for state intervention in long-term care. This result arises from their consideration of the value of insurance and the necessity of government intervention to make insurance work due to moral hazard and adverse selection. Similarly, Wan outlines considerations for the evaluation of long-term care programs. Another interesting body of economic research looks at the political economy of long-term care. This literature is useful because it takes a more comprehensive view of the costs and benefits of long-term care, including both financial and psychological burdens, as well as how they might be measured. Roeder and Nuscheler s model shows that public spending on long-term care reduces need related income inequality. From an empirical public-economy angle, public polling shows that self-interest is a significant factor in

22 18 support for medical benefits for the elderly (Day, 1993), and that support is weakest in young adults with less contact with their grandparents (Silverstein and Parrott, 1997). Theoretical Framework Introduction This research is broadly built on the theoretical framework of micro-economics because of its primary concern with efficiency, equity and effectiveness -- key concepts which are used to evaluate policy options. This paper also draws on the framework of health economics by focusing on measures such as Quality Adjusted Life Years. More specifically, this paper builds on the theoretical model of Kuhn and Nuscheler (2011), whose two-setting model of home and institutional care showed that that those with more severe needs will self-select to receive institutional care, and institutional care will be overprovided relative to home care due to its informational superiority, i.e., the government can tell the person needs care and measure that it was delivered. Incorporating Interdependent Utilities This paper looks at a caregiver maximizing a weighted sum of the utilities of family members. This approach differs somewhat from the classical microeconomics assumption of an independent self-interested decision-maker. The main reason for this adaptation is that, in the context of long-term care decision-making, it is a central and common feature of the existing models discussed above that they include altruism whereby the utility of the caregiver is partially dependent on that of the care recipient. Recipients of long-term care, particularly those in nursing homes, may also lack the mental capacity to understand what is in their best interests due to dementias, so the legal power over their assets and in health

23 19 care decisions (Power of Attorney) is often granted to their caregiver (Ontario Ministry of the Attorney General, 2008). Economics provides a variety of concepts that could be used to describe this relationship. For example, the model could state that care for the elderly provides a positive caring externality to their care givers (i.e., there are benefits not captured in the market transaction between care supplier and care recipient), or one could define a utility function maximized by the care giver that includes the happiness of the care recipient. This second approach is adopted by Khun and Nusheler who assume a fully altruistic 3 only-child acting as a decision maker for the care of a single parent. However, they give the function for the child s decision in a more general form that allows for multiple levels of altruism: Child s Utility = Comfort (Own Consumption) + Altruism * Parent s Comfort (Care) This altruistic decision maker approach is functionally equivalent to treating the family as a rational decision making unit with pooled resources 4, and consistent with this, the child and family are used interchangeably as the actor in narrative descriptions of decision making by Khun and Nusheler. Another equivalent concept that could be applied is that of agency, where care givers partially act as agents for their elderly relatives. This understanding would be consistent with the expectation that care givers will speak on behalf of their parent s interests in relations with health providers (Power of Attorney for Personal Care) and over their assets (Continuing Power of Attorney For Property). However, the only enforcement mechanisms present are internal and social pressures (or 3 In full altruism, equal weight is given to the happiness of the parent and child. 4 Not all families will function in this way and this could impact the efficiency impacts of the tax credit. For instance if a wife provides care, but the tax credit is counted against her employed husband s income (perhaps because she did not reach the income threshold at which positive taxes are owed and the credit would be valuable) and they do not share resources, her decision may be less influenced by the tax credit.

24 20 inheritances) and the idea of a care giver acting as an agent for a care recipient whose interests are in competition with their own self-interested desires is inconsistent with the focus of microeconomics on financial incentives. Model Focus This report s model assumes a family with one employed potential care provider and one care recipient where resources are pooled and the recipient s condition is severe enough that they are eligible for care in a nursing home, but manageable enough that they still could be cared for in the provider s home. This is the basic unit required for the tax credit to be relevant. A care recipient with no potential providers cannot claim the tax credit, regardless of whether they are purchasing care in their home or receiving care in a nursing home. The care provider would likely have to be employed in order to reach the threshold at which positive taxes are owed and non-refundable tax credits become relevant. 5 It does not particularly matter whether the care provider is a child or spouse, except that a spouse is less likely to be working and therefore less likely to reach the threshold at which non-refundable tax credits become relevant. The pooling of resources (i.e., pensions and benefits of the care recipient are controlled by the care provider) is significant because it simplifies the problem to a tradeoff of time and monetary resources between the direct benefits to the provider and care for the care recipient, which is critical in the graphical analysis below. It should be noted that the Family Caregiver Amount Tax Credit does not benefit care recipients with no potential care providers who are willing to look after the care recipient in their home. Where the care recipient could get by on care in 5 Alternately, the care provider could have non-employment (interest and dividend income) or could have a spouse who was employed, but in the data analysis below most care givers have employment income.

25 21 their own home, but instead inefficiently substitutes care in a caregiver s home to receive the tax credit, the credit likely creates an efficiency loss. Mathematical Theoretical Model The mathematical theoretical model presented here is intended to describe the major factors in a caregiver deciding how to care for a dependent care recipient who is eligible for institutional care. The care provider maximizes a family utility function (the maximum possible W value between equations 1a and 2a), a weighted (x) sum of the care recipient s utility (U R ) and the care providers self-interested utility (U P ), subject to the time (T P ) and budget (C P ) constraints. In this basic form, the model describes the choice of care options for any period up to the death of the elderly relative. The care provider s utility is a function of their leisure (L P ) and consumption (C P ). 6 The care recipient s utility is a constant (U RI ) in institutional care, otherwise it is a function of the number of hours of care provided at home by relatives (A P ) and by paid home care providers (D). 7 The time function (Equations 1b and 2b) represents that the care provider s time (T P ) must be allocated between hours of work (K P ), hours of leisure (L P ) and hours of care for the care recipient (A P ). The budget function (Equations 1c and 2c) represents that the amount left for the care giver s consumption is the care giver s employment income plus the government benefits and pension income of the elderly relative (B R ) and the care provider (B P ), less the costs of care. Employment income is the product of the hours worked (K P ) and the care giver s wage net 6 Consumption and Leisure includes any altruistic value the care provider receives from spending time or money on activities with other family members such as children or grandchildren. Their utility is also dependent on the utility of their parent, but this altruism is separately captured in the weighing of the decision making criteria, the focus of this term is on their self-interested utility. 7 Although of some relevance, consumption of the parent is excluded here for the sake of simplicity, because the primary concern of the care provider is with their health, rather than happiness, and many receiving care may be physically or mentally incapable of making consumption decisions.

26 22 of tax (n). The financial costs of institutional care (I) 8 may depend on the care recipient s income (B R ), 9 while the cost of outside home care is the product of the hours worked by paid home care providers (D) and their hourly rate net of subsidy (r). Home Care Institutional Care W Home = x * U R (A P,D) + U P (L P, C P ) (1a) W Institution = x * U RI + U P (L P, C P ) (2a) T P = K P +L P +A P (1b) T P = K P +L P (2b) C P = K P *n + B R + B P D*r (2b) C P = K P *n + B R + B P I(B R ) (2c) In practice, many elderly persons receive home care for some time before moving into institutional care. The model here is thus not static, but rather dynamic as U R (A P,P) and U RI change over time as the care recipient s health declines until they reach the point modeled by Kuhn and Nuscheler where the greater medical care available in institutions tilts the balance, such that the care provider decides to rely on institutional care. However, the same factors that make home care more or less desirable as a static choice are the same factors that will delay this decision as to when to turn to institutional care, so this static model is still useful for modeling this dynamic decision. First Order Conditions Focusing on the home care system of equations, the equations can be seen as having three choice variables, hours of care provided (A P ), hours of leisure (L P ), and the amount of paid care purchased (D). The objective function can be written as W Home = x * U R (A P,D) + U P [L P, (T P -A P -L P )*n + B R + B P D*r] 8 For the details of the cost arrangements see page 6. 9 This may include income other than government benefits such as dividends and interest of savings.

27 23 The first order conditions for this equation are: Equation F 1 shows that the opportunity cost of leisure is the utility gain associated with consumption that could have been achieved by working at the wage rate for the same amount of time. The application of the equi-marginal principle suggests that at the margin (in the absence of market distortion), care givers value an hour of leisure at their wage rate. Equation F 2 suggests that the opportunity of cost for an hour of care by relatives is equal at the margin to the utility gain associated with consumption that could have been achieved by an hour of work at the care givers wage rate. The application of the equimarginal principle suggests that (in the absence of market distortion) the weighted marginal value of care to the care provider (i.e., the utility they derive from it being provided to the care recipient) is equal to the care givers wage rate. Equation F 3 indicates that the after-subsidy opportunity cost to the care provider of an hour of care by paid care providers is the utility gain associated with consumption that could have been achieved with the hourly cost of care. The application of the equi-marginal principle suggests that (in the absence of market distortion) the weighted value of care to

28 24 the elderly relative is equal at the margin to the value of the money spent for consumption of the care provider. The most significant equation for this report is equation F 2 as it indicates the factors that will lead a care provider to choose to provide more care. Aside from emphasizing the importance of caring for elderly relatives, there is little the government can do to affect x, the weight put on the utility of the care recipient. Sociological solutions to effect x, for instance policies that promote workforce (and therefore caregiver) migration, promote physical separation which may weaken emotional bonds (Smith, 1998). Coercive solutions could also be used, such as legally compelling children to care for their parents as is the case in some US states, British Columbia, Nova Scotia, New Brunswick and Singapore (Martin, 2010). For example, in British Columbia under the 1922 Family Relations Act A child is liable to maintain and support a parent having regard to the other responsibilities and liabilities and the reasonable needs of the child (Spencer, 2011). When tempered by the needs of the child in this way, these liability laws essentially mandate a minimum value of x. Government might be able to affect δu R /δa, the productivity of care in providing utility for the care recipient, for instance, by training care providers. An increase in taxes would decrease the wage net of tax (n), but increase δu R /δc, the degree to which the care provider values their income. The impact on informal care provision of these competing substitution effects (work earns less) and income effects (money is valued more) is theoretically ambiguous. A per hour subsidy for care by relatives, or removal of the subsidy for care by outsiders, would most directly create substitution towards care provision by family members.

29 25 These first order conditions assume that there is an internal solution, i.e., that the optimal solution to the families maximization problem relies on home care, rather than institutional care. Assuming substitutability between home and institutional care, even if a tax credit does not replace the subsidy for care by outsiders, it would still increase the provision of care by families because it makes informal care more appealing relative to nursing home care. Because it would only have an income, rather than substitution effect for current care providers, a fixed-rate subsidy like the tax credit would likely not substantially affect the hours of care provided by family. Graphical Analysis One could simplify the model above to a trade-off in the allocation of time and money between activities that contribute directly to the utility of the care provider (aka. Full income, a function of consumption and leisure) and activities that contribute to the utility of the care recipient (a function of the number of hours of care by family and paid providers in home care or a low constant and a minimal cost for institutional care). When framed in this way, there is a downward sloping budget constraint showing the combinations of utilities that can be achieved with care in the home (paid or provided by family) and a point that represents the option of institutional care (which as a set price and a low constant for quality of care) as shown in (Figure 3):

30 Figure 3: Illustration showing a decision to place the care recipient in institutions in a trade-off between care giver utility and care recipient utility 26

31 27 This model does not produce any unambiguous results as to the impact of the tax credit except that it makes home care more appealing relative to nursing home care, potentially creating substitution as shown in Figure 4:

32 28 Figure 4: Illustration showing a decision to substitute home for institutional care as a result of the tax credit in a trade-off between care giver utility and care recipient utility In this possible outcome, the credit results in a decision to care for the elderly relative in the home (saving government money) and resulting in higher quality care, but less caregiver consumption/leisure. It can be shown that this represents an efficiency improvement over the same decision without a tax credit as shown in Figure 5:

33 29 Full Income or U P Avoided Cost Potential Efficiency Gains with Tax Credit Institutional Care Public Cost Institutional Care Private Cost Cost of Credit Indifference Curves Old, New Home Care Budget Constraint with Tax Credit U R (a function of care setting, paid hours, and family hours) Figure 5: Potential Efficiency Gains with Tax Credit With the indifference curves assumed above, the tax credit makes this family better off (allows them to achieve a higher indifference curve), while having a net negative cost (because the cost of the credit is less than the avoided cost of care). Because the families can be made better off at lower cost, there is a potential efficiency gain associated with the tax credit. However, it is worth noting that the current tax credit represents less than 2% of the person s income, even at its peak (see data analysis below), so very few families are likely to be close enough to the margin for this result to occur. In addition, the cost of the credit to government (as they cannot perfectly distinguish between those who will and will not substitute) will exist for many families that are not close enough to the margin for it to make a difference. From an economic perspective, ineffective credits that do not shift the balance of a decision are a neutral transfer, their cost is exactly offset by the benefits to

34 30 families, exempting the economic cost (inefficiency) associated with raising tax revenue. The benefits received from families at the margin substituting would have to be weighed against the costs of raising tax revenue. An additional caution is that the gain from substitution may be partially offset by the inefficiency in the home care market due to distortion between care provided by family and paid help. Both subsidization and the public provision of a limited amount can be shown to be inefficient in some circumstances (As shown in Figures 6 through 8 below). Likewise, the incentive might primarily serve to reduce the waiting list, rather than reduce the number of people receiving institutional care, which is a worthwhile activity, but would not produce cost savings in the way shown above (except where care recipients moving to home care are waiting in hospitals). Figure 6: Illustration of how the home care mix might be affected the Medical Expenditure Tax Credit (a subsidy)

35 31 Figure 7: Illustration of the inefficiency resulting from the subsidy in Figure 6 Figure 8: Illustration of how the home care mix might be affected the limited provincial provision of care

36 32 If the budget constraint is shifted to the right (from original to new) because the government provides a fixed amount of care in the home (the publically provided amount), as a result (in this example) much more care is provided by family (from F1 to F2) and a little more paid care is provided (from P1 to P2), and the family is much better off (can reach a higher indifference curve). This situation might occur if the person only required a fixed amount of paid care (ie. Has a near vertical indifference curve). Figure 9: Illustration of the inefficiency resulting from the public provision in Figure 8 This diagram compares the result that can be achieved with some public care provision to that which could be achieved with a cash grant, the theoretically optimal option. It shows that where there is a corner solution (ie. the family chooses not to purchase any paid care beyond the care that the government provides), there is inefficiency (because