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The Progressive Economics Forum

Income Splitting: A Bad Idea Returns

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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Comment from Sixth Estate
Time: March 28, 2011, 11:53 am

A month or so ago this was being plugged in the papers by a religious right front group, the Institute of Marriage and Family Canada. I wonder if that’s the constituency Harper is trying to appeal to here.

Comment from Travis Fast
Time: March 28, 2011, 1:03 pm

I agree in general but in my particular situation I can see the allure of the idea.

We have to full time jobs with one stable income. So the idea of income splitting when the art is not selling is appealing.

I found it weird that they were pushing an idea that would only at best be implemented in a second mandate. Maybe Harper really thinks he is running in a presidential system.

Comment from Sixth Estate
Time: March 28, 2011, 1:19 pm

“Maybe Harper really thinks he is running in a presidential system.”

Or maybe it’s yet another one of the recent string of “YAY! TAX BREAKS!” announcements which comes with a giant caveat rendering it basically meaningless.

Even with the limitations, the message seems to be that the children of rich parents are worth more than the parents of poor ones (since their tax benefits would be greater, assuming they are eligible in the first place). If the Conservatives really wanted their “pro-family” agenda, they would give a refundable credit to any parent.

Comment from Donald Hughes
Time: March 28, 2011, 5:50 pm

The cost of Harper’s split is projected at $2.5 billion a year. I think you could add $1,250 to the child tax credit baseline for that cost. Or fund the framework for a national child care program.

“If the Conservatives really wanted their “pro-family” agenda, they would give a refundable credit to any parent.”

Well, they did that too. It’s called the universal child care benefit.

Comment from Sixth Estate
Time: March 29, 2011, 5:44 am

Correct me if I’m wrong (I don’t have kids), but the Universal Child Care Benefit is around $1000 a year. The benefits of income splitting would not be large for most eligible people, but in theory could be several times that amount. And my point is that if some families deserve that amount, it doesn’t make sense to say that all families don’t.

Comment from andrew jackson
Time: March 29, 2011, 6:04 am

Good point re provincial revenues but I think the estimated loss is too high. In 2008 total provincial PIT revenues were only $48 B of $162 B total PIT revenues accordign to CRA stats but perhaps I am missing something

Comment from Erin Weir
Time: March 29, 2011, 6:46 am

I am unfamiliar with the figures you cite, but my sense is that provincial PIT revenue is more than half of federal PIT revenue. (I am skeptical of $48 billion as a provincial total since Ontario’s PIT alone brings in at least half that amount.)

According to Statistics Canada, federal PIT revenue was $108 billion and provincial PIT revenue was $70 billion in 2010. To the extent that provincial PIT is less progressive, the fiscal cost of income splitting would be proportionally less for provincial governments. But I think that “about a billion dollars” is still a pretty cautious estimate.

Comment from Andrew Jackson
Time: March 29, 2011, 1:55 pm

Here are the CRA data for net tax paid – see totals at end. Feds are 68.6% of the total. I would have guessed lower but maybe the definitions are important

Comment from Erin Weir
Time: March 29, 2011, 2:23 pm

Those figures are tax collected by CRA, so they exclude Quebec’s PIT. Check out “Net Provincial Tax or Territorial Tax” at the bottom of this table. (CRA collected provincial tax from only 3,500 people in Quebec, which runs its own tax collection.)

My estimate includes all provinces. Perhaps the question is whether or not Quebec would go along with income splitting?

Comment from travis fast
Time: March 29, 2011, 5:16 pm

I doubt Quebec could afford it. And given they already have several good programs to help out poorer families they would likely argue they do not need it.

Comment from MilesT
Time: March 30, 2011, 8:06 am

In addition ..I believe, although not sure, that in NZ if you transfer a certain amount to your spouse you then forgo the deduction for child care

Comment from Darwin O’Connor
Time: March 31, 2011, 9:43 am

I have turned my comment from 2006 into a blog post: Does having two incomes make people worse off?

Comment from Chris S
Time: April 3, 2011, 11:36 pm

Erin, in the Star article, you are quoted as saying:

“Extending income splitting would not help the people who are most in need: Single parents, unattached individuals, and families with no employed members or with self-employed members would not be eligible”

The item that got my attention was ‘families with self-employed members would not be eligible’; however, after much searching (including Conservative announcements) I can’t find anything one way or the other one this.

Do you have a reference so that I can look into this more? On the surface, this looks like an attractive policy, but if there are gotchas just below the surface, I’d like to read about them in the original sources.

Comment from Erin Weir
Time: April 4, 2011, 2:29 am

The text reproduced here and quoted by The Star was my 2007 op-ed as printed by The Ottawa Citizen. Your excellent inquiry prompted me to check my files.

My submission read: “families with no employed or self-employed members would not be eligible.” Indeed, the op-ed was published that way in several other places.

Unfortunately, there was a slight editing mishap at The Citizen, which I forgot about over the past four years. Thank you very much for catching it. At the risk of closing the barn door after the horse has bolted, I have corrected the wording above.

A couple of other points are relevant to income splitting and the self-employed. They generally earn or report substantially less income than employees.

According to Statistics Canada, “On average, Canadians who only had income from self-employment in 2005 earned $22,866.” Almost twice that much taxable income would be needed to possibly benefit from income splitting.

Those self-employed Canadians who do earn and report enough income can transfer it to other family members for tax purposes by “employing” them. To the extent that the self-employed and pensioners can already split their incomes, they do not stand to benefit from the Conservative promise. However, this promise does not explicitly exclude the self-employed.

Comment from Travis Fast
Time: April 4, 2011, 7:36 am

My partner is a self employed artist (almost true by definition). We would benefit from income splitting. I agree though that the way the con plan is structured that it gives a greater tax break to those who do not “need” it the most. In principle an income splitting program could be devised that did not have the above defect (probably a feature for the Cons).

Whatever the case I would rather see a program to address stagnant wages, high unemployment and the structural causes of lower wages for women than men. Using the tax system is just another after the fact amelioration of consequences not causes.

Comment from Erin Weir
Time: April 4, 2011, 7:58 am

You would benefit from income splitting because your partner (sometimes) makes less than you. If your partner made more than you, they could shift taxable income to you by employing you in the art studio.

Your situation makes the case for some kind of income averaging, but not for income splitting. What about single artists whose incomes also fluctuate?

Comment from Travis Fast
Time: April 5, 2011, 8:05 am

Just to clarify.

If and when my partner makes more than me I am going to retire into the position of a Motown agent. Then we will both be self-employed and everything we do will be a tax right-off.

Second I am against income splitting on principle, I am just trying to explain why it gets political traction.

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