Another tax cut gimmick? Opening thoughts on income splitting
There is a crisis of poverty and homelessness in Canada. A poll released by the CCPA yesterday found that Canadians across all regions and demographic categories feel that the gap between rich and poor is growing. There are major challenges that require attention, such as fighting climate change. A poll in the Vancouver Sun the other day found that almost three quarters feel that the world as we know it could end in two or three generations.
And yet the federal Tories are obsessed with finding ever more clever ways to NOT act on issues that matter, and to in fact reduce our capacity to act in the future. Income splitting is an example of a reform to the tax system that would cost $5 billion per year. With that kind of price tag, we really need to think about the opportunity costs. If the wedge issue in the next federal election is big tax cuts versus fighting poverty and climate change, bring it on.
Stephen Gordon at Worthwhile Canadian Initiative comments:
[I]f you had $5b of public money to allocate, this particular example of inequity comes very, very low on my own personal list of priorities. I can see the logic for income-splitting, but why not make the change revenue-neutral by increasing income tax rates at the same time? (Alright, we already know the answer to that one.)
Besides, horizontal equity isn’t the only consideration. Since the gains would largely go to those at the upper ends of the income distribution, vertical equity should be taken into account as well.
… In case the Conservatives have really run out of ideas for spending that money, here are a few:
â€¢ Beefing up transfer programs such as the GST rebate and/or the Child Tax Credit
â€¢ An Earned Income Tax Credit
â€¢ Make it easier for students from low-income households to pursue post-secondary education (no, this does not mean reducing tuition fees).
And if they really, really feel that they have to cut taxes, they should be cutting corporate taxes, which are high by international standards. The payoff here would be increased investment and productivity. Canada’s low rate of productivity growth is a chronic problem, and is much more important than the one that income-splitting would solve.
I’m open to arguments on both sides of the income splitting issue. I might even support a revenue-neutral shift to income splitting, as Gordon contemplates. But I think that this issue is framed in a confusing way by proponents. Consider this example from coverage in the Toronto Star:
Under current tax law, a family in which one spouse works, earning $80,000 a year, and the other spouse has no income will pay $12,460 in federal income tax. Under income splitting, the couple would pay a combined total of $8,940, a saving of $3,520, according to calculations by the Canadian Taxpayers Federation.
A family in which one person earns $60,000 and the spouse earns $20,000 currently pays total federal income taxes of $10,280. Under income splitting, that family would pay a total of $8,940, a saving of $1,340.
A family with two partners earning $40,000 each pays a combined federal income tax of $8,940. There would be no change under income splitting.
I get the premise of treating equal families equally. But the problem in this oft-cited example is that there is a hidden assumption about how families can structure their income. If I earn $60,000 and my spouse $20,000, we cannot just decide that my spouse should stop working and that instead I should earn $80,000 per year. The actual choice is me earning $60,000 and my spouse not working.
Whereas the family with one earner making $80,000 could choose to have the spouse enter the labour market and earn whatever he/she could get. And if that spouse stays at home, the family derives an economic benefit from that situation, whereas in the $60K/20K case there are additional costs of participating in the labour market such as transportation and child care. So the two families are not actually equivalent.