Income Splitting Redux
On October 31, Finance Minister Flaherty announced that pension income could be divided between spouses for tax purposes. More recently, he mused about allowing spouses to divide all income for tax purposes. This latter proposal would benefit an affluent minority at the expense of important public programs and create a disincentive for women to engage in paid employment.
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 the October 31 announcement. These types of households, which would not benefit from further income splitting, encompass 9.7 million Canadians and have median market incomes of only about $20,000 per year.
Approximately 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. Therefore, low-income families would be excluded. By contrast, income splitting would provide tax savings of $3,800 to a household with one spouse making $196,000 and the other making $36,000.
Only 2.8 million Canadians live in single-earner families, the ones most likely to gain from income splitting. However, such a family with an income of $36,000 or less could only save $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 massive gift to rich people whose spouses stay home.
This proposal would cost the federal government about $5 billion per year, greatly reducing the resources available to finance public services that benefit all Canadians. 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. There may be a theoretical argument that a householdâ€™s tax liability should not change simply because it â€œchoosesâ€ to have one spouse work full-time for $60,000 rather than having both work part-time for $30,000 each. However, very few Canadians enjoy such flexibility regarding work hours. The more realistic scenario is that the single-earner family has one spouse working at a well-paid job and the other spouse doing unpaid work at home, whereas the dual-earner family has both spouses working full-time at less lucrative jobs and doing unpaid work at home.
A 1999 report of the Standing Committee on Finance unanimously concluded, â€œa 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 with respect to the second worker, the value of unpaid work in the home, or leisure, must also be taken into account.â€ The Ontario Fair Tax Commission noted, â€œit has been shown that single-earner couples may have greater ability to pay than two-earner couples with the same income.â€ The current system of taxing individual income, with credits for dependent spouses and children, is more equitable than income splitting.
The argument for income splitting presumes that spouses pool their income and benefit equally from it. While some families may organize their finances in this manner, many others do not. Uncertainty regarding income distribution within households is another reason to retain individual income as the tax base.
Income splitting would undermine the economic independence of women. In those heterosexual couples with large income gaps, the woman generally has the lower income and faces the lower tax rate. Subjecting each couple to a common tax rate would increase the rate at which income earned by these women is taxed. Relative to the current system, income splitting would provide a disincentive for them to engage in paid employment. Not surprisingly, the leading advocates of income splitting are socially conservative groups which believe that women should stay home.
Parents should have the option of caring for young children at home. However, giving money to some couples in high tax-brackets is not a fair or effective way of providing this choice. There are progressive policies to give working people more time to care for their children. 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. Governments should develop a national daycare program so that parents who need or chose to continue working full-time can access high-quality care for their children.
For the supporting statistics, please go to page fourÂ ofÂ
UPDATE: The Regina Leader-Post printed a slightly revised version of this piece on December 13.