Since the Conservatives are promising income splitting, it may be worth revisiting some classic Relentlessly Progressive Economics posts on the subject. Some of the links we posted four years ago no longer work, so my Ottawa Citizen op-ed is reproduced below. While the population totals and tax thresholds have changed slightly, the analysis stands.
The Conservatives have somewhat limited the fiscal cost and giveaway to the rich by restricting the proposed tax shift to $50,000 per couple with children. However, their proposal would not help the Canadians who need it most.
When income splitting was floated four years ago, it would at least have allowed low-income, single-earner households to claim two basic personal credits instead of one basic personal credit and one spousal credit. Since then, the spousal credit has been increased to equal the basic personal credit. As a result, there is no possibility of low-income families benefiting from income splitting.
UPDATE (March 29): Quoted in Barrie McKenna’s excellent Reality Check on page A4 of today’s Globe and Mail. As he points out, a couple who can shift $50,000 from the top federal tax bracket to a spouse without income would gain more than $6,000 ($50,000 at 29% is $14,500 versus $50,000 in the bottom brackets is $8,100, a difference of $6,400).
By contrast, a family with one or both parents earning up to $41,000 would get nothing. Armine also nailed this issue in yesterday’s Economy Lab.
Another aspect of the proposal that should be questioned is its likely impact on provincial governments, whose taxes generally apply to income as defined by federal tax rules. If it would reduce annual federal revenues by $2.5 billion, it could also reduce combined provincial revenues by about a billion dollars.
The Conservatives have promised to wait until the federal budget is balanced. Would they also wait until provincial budgets are balanced?
ANOTHER UPDATE (March 29): Quoted by The Financial Post’s Wealthy Boomer
YET ANOTHER UPDATE (April 3): Quoted in The Toronto Star
Income splitting isn’t fair
The Ottawa Citizen, Page A13, Friday, February 2, 2007
This week, supporters of income splitting for tax purposes met on Parliament Hill. Finance Minister Jim Flaherty has already announced that pension income will be divisible between spouses for tax purposes. But extending this policy to other income would benefit a wealthy minority at the expense of important public programs.
The government of Canada should not extend income splitting, but should implement other policies to give working people more time and resources to care for their children. Extending income splitting would not help the people who are most in need: Single parents, unattached individuals, and families with no employed or self-employed members would not be eligible. Families headed by seniors were already covered by Mr. Flaherty’s announcement regarding pension income. The 9.7 million Canadians who live in these kinds of households, which have median market incomes of only about $20,000 per year, would not benefit from further income splitting.
About 18.7 million Canadians live in families with two or more earners. Such households could take advantage of income splitting only if one spouse is in a higher tax bracket than the other. No benefit would be possible if both spouses are in the lowest bracket.
Only 2.8 million Canadians live in single-earner families, the ones most likely to gain from income splitting. However, this kind of family with an income of $36,000 or less could save only $200 through income splitting, the difference between the personal and spousal tax credits. By contrast, a single-earner family with an income of $230,000 would retain an extra $9,000. Income splitting would be a huge gift to rich people whose spouses stay home.
This proposal would cost the government about $5 billion per year, greatly reducing the resources available to finance public services. It would provide extra money to some couples in high tax brackets at the expense of single parents, unattached individuals, seniors and most working families.
Promoters of income splitting claim that it would equalize the tax burden between single-earner and dual-earner households. For example, they question the fact that a couple with one spouse earning $60,000 currently pays more tax than two spouses earning $30,000 each.
But the couple with one spouse earning $60,000 is already better off. A 1999 report of the standing committee on finance unanimously concluded that “a dual-earner couple with the same total income as a single-earner couple is not as well off as the latter. Not only are there additional employment-related expenses that must be incurred regarding the second worker, the value of unpaid work in the home, or leisure, must also be taken into account.” The Ontario Fair Tax Commission noted, “it has been shown that single-earner couples may have greater ability to pay than two-earner couples with the same income.” The current system of taxing individual income, with credits for dependent spouses and children, is more equitable than income splitting. Parents should have the option of caring for young children at home. However, giving $5 billion to couples in high-tax brackets is not a fair or effective way of providing this choice.
The Employment Insurance system should provide longer maternity and paternity leaves with adequate benefits. Labour legislation should be amended to ensure benefits for part-time workers, family-responsibility leaves, and regular work hours. And governments should develop a national day-care program so that parents who need or choose to continue working full-time can have access to high-quality care for their children.
Erin Weir is an economist for the Canadian Labour Congress.
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