Dumb tax ideas… November 24
You may be aware that I am not a big fan of our current government. So you will be unsurprised to learn that I think some of their budget ideas are less than spectacular. Steph and I have been having an e-mail discussion about one of them and it occurs to me that some of it could be reproduced here.
The particular idea we have been fuming about is tax splitting. This is a proposal to allow couples to split their incomes between them before calculating income tax. The idea is that it reduces tax payable, particularly for couples where only one partner is employed. Neither of us is a big fan of tax cuts in general but we particularly object to the way that this proposal is being sold as a benefit to “families”. The fact is that like most Conservative tax cuts it is primarily beneficial to the rich, reducing revenue to the state that might then be available for helping actual families who might need it.
This press release from Queen’s University provides some interesting facts about tax splitting policies. It includes this summary of the (lack of) benefits:
Kathy Lahey, author of Women and Employment: Removing Fiscal Barriers to Women’s Labour Force Participation (Status of Women Canada, 2005) and an earlier study on the impact of joint taxation on couples in Canada for the Law Commission of Canada, says that when it comes to the income splitting benefit at tax time:
- only couples need apply
- only couples who can afford to live on one high income will benefit
- the higher that single income, the larger the tax bonus to the couple:
- at $80,000 income, the tax bonus is approx. $3,500
- at $140,000 income, the bonus is approx. $10,000
- there is no upper limit on how high this bonus can go
- it ‘s ‘upside down’
- those who need it the least will get the most
- those who need the most help will get none or the least
I had heard this $80,000 figure used in other examples. The point this specialist in income tax is making is that the benefit is pretty small at this level but it seemed like $80,000 a year is quite a lot of income for most folks. Off to Statistics Canada I go, where I discover that median income for couple families in Canada is $64,800. This means (for those of you whose statistical knowledge is rusty) that half of all couple families in Canada have an income of $64,800 or less. I bet that even at the median income the benefit of income splitting is tending towards negligible.
One should also keep in mind that many of those couple families will have two incomes, even if one of the incomes is greater than the other. Because we are not taxed at the same rate on all of our income, the benefit of income splitting will be less for those couples where one partner earns a relatively low salary because the income redistributed will not go into the lowest marginal tax rate but the next band up. Since the benefit is so small anyway, except for the highest earners, this policy will not make any tangible difference to their lives and certainly wouldn’t allow the lower income earner to stop working in favour of some unpaid activity even if that were her desire (and in the vast majority of cases it will be a her).
Thinking about the families that I know both IRL and on-line who have made decisions to have one partner be the primary earner while the other takes primary responsibility for children (including, perhaps, homeschooling), I note that many of them value family over paid work. They have deliberately chosen to live on a lower income in order to spend more time with their children and each other. In some cases, this has also meant that the primary earner is earning less than he could otherwise earn in order to work closer to home, or to work more family friendly hours. Many of the women, although prioritizing their children and home, also do some paid work either part-time for an employer or freelance.
None of these people would actually benefit from the tax splitting proposals that are being discussed. The lower income earner is already earning a substantial chunk of the income that is tax free or taxed at the lowest marginal rate. And the higher income earner is not earning very much (if anything) that is taxed at the highest marginal rate (in Ontario this kicks in at $115,739 if my calculations based on the 2005 tax tables are correct).
No, the main purpose of this particular tax proposal is to make a whole bunch of social conservatives think that the government is supporting their values, particularly around a traditional division of labour within couple families, while the Conservative government actually supports the rich folks that they usually support with no tangible benefit at all to most single earner couple families. I’m not a big fan of tax cuts (particularly in already low-tax economies like Canada and the US) but if you were going to go that route, it would be more beneficial to raise the income levels at which various marginal tax rates kicked in, than to provide cuts that have their main effect at higher income levels.
And if you wanted to promote policies that would allow families to spend more time together, particularly with their children, it would make more sense to focus on long-hours cultures, part-time working conditions, and wages. After all, some folks do their own form of income-splitting by dividing up the total work needed to earn enough to support the family between both adults so that both parents can be more involved in the lives of their children.
An associated point is that as taxpayers we might want to be concerned with the risks associated with particular policies in terms of future spending. It seems to me that it is not in the interest of the state to support single earner families. Time out of the labour market is negatively associated with income earning potential. Thus women who take substantial time out of the labour market are at greater risk of being dependent on government assistance if their relationship breaks down. Even part-time work that keeps up their skills and contacts will substantially lower this risk.
And the men who are earning salaries that would mean their families actually benefit from income splitting are more likely to be working long hours. This not only puts strain on their family relationships, it also means that they spend a lot of time with other people. Any woman who thinks she will benefit from this proposal should consider how much this government would support her if her high-earning husband runs off with his secretary and decides he doesn’t want to support her and her children any more. Not a pleasant thought, to be sure, but it does happen.
While individuals might choose to take on this risk themselves, it is not at all clear to me why the state should be encouraging this risky behaviour. The available data on the impact of divorce on women’s incomes, and the disproprotionate number of mother-headed families receiving government assistance should be a warning. You might also note that the median income for lone-parent families is only $29,500.



