Tax Points and Fiscal Transfers

I was recently talking to our resident expert in Federal-Provincial relations, none other than the infamous Herman Bakvis, and we got talking about tax points. He was pretty upset with an article that Andre Picard had wrote about the decline of health transfers as Picard made no mention of tax points. I encouraged him to write an article for the G&M, but I am not sure that is his bag.

It did get me thinking about why understanding your history is so important to policy analysis. And tax points are a very important piece of history if you are to ever truly understand fiscal transfers. If you are into reading whole books about taxes and transfers, I might suggest you pick up a copy of Financing the Canadian Federation, 1987 to 1995: Setting the Stage for Change published by the eminent Canadian Tax Foundation (not to be confused with the Canadian Taxpayers Federation).

In 1962, tax points made their emergence, as the tax rental arrangements expired. The tax points system was a system of tax abatement: the federal government would not collect a portion of its taxes, instead leaving taxing room so the provinces could raise their own taxes. The importance of tax points to understanding today’s transfers occurred in 1977 with the establishment of federal transfer programs in health and education. This is when the federal government agreed to transfer funds for health and education and the value of this transfer was made up of both cash and tax points. The value of the tax points under this arrangement though varies from province to province so it is only the combination of cash and tax points that provides each provinces with the same per capita support.

This system of a mix of cash and tax points continued to March 31, 2014 (which is why these transfers will seemingly increase after this date) and any analysis of cash transfers for health and education before this date must consider tax points in addition to the cash transfers, an oft overlooked complexity. The problem is that it can be quite difficult to get numbers on the value of the tax points. The Department of Finance used to show this series on their website, but I am unable to locate it on their current website.

The best source I could find was Wikipedia which says this: “In 2008-09, CHT cash transfer payments from the federal government to the provinces and territories were $22.6 billion and tax point transfers were worth $13.9 billion.” With respect to the education transfer, “In 2008/2009, the programme transferred $10.6 billion in cash to the provinces and a further $8.5 billion in tax points.” As you can see, not considering tax points leads to a substantial undervaluing of federal transfers.

When the tax point system was in place, the federal government was quite hesitant to increase its transfers because the tax point system would then allow the provinces to cut provincial taxes AND take all the credit. Going forward, transfers will now solely be based on an equal per capita cash basis, and the federal government is free to increase funding without worrying about not getting the credit. However, it is worth noting that when tax points are excluded from consideration in health transfers, every province except Alberta gets less cash per person. So expect to see the provinces up in arms yet again over transfers.

The new cash-based system also means that comparison will be much easier to make going forward. I do, however, wonder how many arm chair analysts though will forget their history and make inappropriate comparisons between cash transfers pre and post the tax point regime?

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The Economics of organ donation registration and the system of consent

The government in Nova Scotia is jumping into the organ donation frey by considering changing the cadaveric organ donation sign up system from an opt in system to an opt out system. That is, rather than having to check a box saying you want to register as a cadaveric organ donor, instead you have to check a box saying you will not register as a cadaveric organ donor. I am using my words carefully as the system is just about registering as a cadaveric organ donor, not becoming an organ donor.

Such a system is being contemplated because, as we all know, the percentage of the population who register as organ donors is quite low. In Canada, while 90% of Canadians indicate that they support organ and tissue donation, only 24% have actually signed their organ donor cards. Why this disconnect you might ask? After all, the cost of registering as a donor is low, so why are more people not registering?

You have to recognize that the cost of registering as an organ donor is not zero. People hate incurring costs. People make decisions by weighing costs and benefits. The problem with registering as an organ donor, are that the benefits accruing the individual are minimal, nothing really other than a ‘warm glow’, but the costs to the individual are the time involved in reading the material, making the decision, ticking the box, and returning the form (either online or incurring another cost of a stamp). Often what happens is that the form is put aside for another day, which never comes. The system forces only those with extremely strong preferences to incur these costs and register as an organ donor, leaving those who don’t hold strong views to remain unregistered.

An opt in system works instead by forcing the cost onto the person who does not want to be registered as an organ donor. This tiny little change in the system, invokes substantial changes in the numbers who register simply by shifting the costs of registration from one group to another group. So if you don’t want to register, don’t want to be an organ donor, you can. You just simply need to register your preference.

By how much do opt out system change the registration rate? We have data from a number of countries to allow us to understand this. In terms of the effective consent rate, Europe provides an excellent comparison, shown in the graph below (reproduced from Johnson and Goldstein). Here you can see that the proportion of the population that registers as a cadaveric organ donor nearly almost 100% in opt out countries, yet ranges between 4-27% in opt-in countries.

organ effective rates

 

 

 

 

 

 

 

 

 

It is important to note that a near 100% registration rate does not translate into a glut of organs, an oft overlooked aspect of the opt-out system. Even in countries with presumed consent, there is a waiting list for organs. An opt-out system does not change the conditions that are necessary to turn someone from a registered donor to an actual donor. Simply dying does not make you a donor. In fact, the best ‘death’ to ensure organ donation is a brain death on a ventilator.

Further, an opt-out system does not make up for poorly organized medical transplantation system, which has to work like clock work. A big problem in Canada is that, unlike the US, we are not governed by a national organ donation system. Canada does not have a United Network for Organ Sharing (UNOS). While there have been multiple attempts to establish one, federal-provincial bickering has prevented one from happening. Instead, each province has its own donor system.

Finally, and probably the most misunderstood aspect of an opt-out system, an opt-out system does not necessarily remove the family from making the final decision. In fact, few systems employ what is called hard consent, where the views of families are not taken into account. That is, opt-out does not automatically mean your family does not get a say. Spain, which has the most success of any country of turning a registered donor into an actual donor, has perfected a system of family consultation at the time of a death that could lead to organ donation.

In implementing an opt-out system, it is essential that due consideration be given to public perceptions and support. We can learn a lot from Britain whose attempt to implement an opt-out policy failed after fierce opposition from Muslims who objected on religious grounds. In a multi-cultural society such an Canada, ensuring public buy-in is important.

Of course, there is a third choice that is not discussed much. A way around the moral debates surrounding an opt-out system, is a mandated choice system. Under a mandated choice system, everyone must indicate their preferences. Such a system is in place in Illinois, which boasts a 60% registration rate compared to a national average of 38%. Such a system circumvents the moral debate, but does not change the other factors that are still necessary to turn a registered donor into an actual donor. If we want to translate registered donors into actual donors, we need to go beyond just the registration system in place.

Don’t abdicate, vaccinate!

Yet another brainless celebutard has entered in to the race for world’s most dangerous mother. Joining the ranks of the infamous Jenny McCarthy is Alicia Silverstone, who in her book released on April 15 spouted the usual antivaccination drivel. Vaccines: contain contaminants and result in irreversible negative effects. The source for her nonsense? Friends whose babies were drastically affected, allegedly after a vaccination round.

Of course, anyone with half a brain can refute this nonsense. Do vaccinations contain ‘contaminants’, or in the words of the scientific community ‘additives’? Yes. Once such terrible additive is formaldehyde. Some vaccinations to contain formaldehyde. The vaccinations that use it are inactive vaccines (e.g. flu shot) and it is used in the production process, but diluted out. If you add up all the shots that contain formaldehyde that a child would get between 0 and 6 years of age, the amount of formaldehyde would amount to 160 times less than the human body produces every day. Wait, what you say? Yes, the body produces and use formaldehyde naturally as part of the metabolic process. There is nothing chemically different between the formaldehyde in vaccines and the formaldehyde in your body.

Another ‘nasty’ additive says Silverstone is aluminum. I find this one particularly interesting coming from such an advocate of breastfeeding because, gasp, aluminum is present naturally in breastmilk. Aluminum is actually the third most abundant element on the planet, third to oxygen and silicon (cough, Jenny McCarthy, cough). It is found in the air, food, water, and the body also produces this element naturally as well. In the case of vaccines, aluminum sulfate is used as an adjuvants in inactive vaccines (e.g. DTap). Infants receive about 4.4 milligrams of aluminum in the first six months of life from vaccines, compared to about 7 milligrams from breastmilk for breastfed babies, 38 milligrams from formula for formula-fed infants, and infants who are fed soy formula ingest almost 117 milligrams of aluminum during the same period.

Many anti-vaccers also talk about mercury, or thimerosal. This is the big one that was blamed for the MMR vaccination causing autism. No routine childhood vaccination made since around 1999 has used thimerosal. So if thimerosal ‘caused’ autism, we would expect a drop in the diagnosis of autism. Unfortunately, the trend is in the opposite direction. More ironically, the MMR vaccination used in Canada has never contained thimerosal. So anyone in Canada claiming that the MMR shot gave their child autism is just plain stark raving mad. The vaccine-autism connection has been described as the “most damaging medical hoax of the last 100 years.”

Are there severe reactions to vaccinations. Yes. Severe problems, though, are quite rare at less than 1 out of a million doses in some cases and as low as less than 1 in 4 million doses with respect to the MMR vaccination. In fact, these reactions are so rare there is no evidence that exists that indicates that these reactions are caused by vaccination. And as is aptly put by Penn and Teller, you are more likely to die of a vaccine preventable disease by not being vaccinated than you are to have an allergic reaction.

It is so important that we dispel these myths, perpetrated by these foolish d-list actors, because there are parents out there who are sucked in by their message. These parents in not vaccinating their kids are not only putting their kid at risk, but they are putting kids at risk who are too young to be fully vaccinated (like my guy) or who are too sick to be vaccinated. How much of a problem is this? Well for school aged-children, it is not a huge problem. The vaccination rate there is between 89-98%, mostly because you have to opt out. When it comes to kids not yet in school, parents have to opt in. We all know it is harder to opt-out than opt-in. In this group, the vaccination rate is a paltry 68-77%. In case you did not know, we need a vaccination rate of about 95% for herd immunity.

Losing a child is unimaginable enough, losing one because of someone else’s stupidity is unforgiveable. So go out there and spread the word. Vaccinations are safe, they can be given without worry at the recommended schedule, and they are free here in Canada. Don’t abdicate, vaccinate!

Tax Lotteries

Imagine sitting in front of the TV waiting with baited breath that your numbers will finally come up, and you will have won the lottery. Now imagine that instead of buying a lottery ticket, you are entered into the lottery by providing your receipts to the tax authority. Wait, what you say? The tax authority running a lottery? That would never happen. Well think again, because in two EU countries they are using a tax lottery to boost value added tax (VAT) compliance rates and collections, and many more are considering it.

Slovakia seems to be on the cutting edge of this idea. Here is the scheme. If you make a purchase totaling more than one euro AND obtain a receipt, you can enter that receipt into a monthly lottery. If your receipt is pulled, you can win €10,000, a car, or chance to be on the Price is Right (Slovakian version).

Slovakia started this scheme in the face of falling revenues from value added taxes (like our HST/GST). The tax authority found that businesses were often failing to provide receipts to its customers, a sure sign of VAT tax non-compliance. In addition, there was also evidence that showed that business were providing a fake VAT registration number on receipts. The lottery scheme encourages customers to force businesses to provide receipts, and incentive to complain to the tax authority is one if not issued. Indeed, complaints are reported to have increased from 300 before the lottery to over 7000 after the lottery came into effect. The scheme also provides the tax authority with evidence of phony registration numbers. It killed two problems with one stone.

Portugal has since followed suit, holding its first lottery this month.

Rudyard Griffiths, Munk Foundation recently proffered this on Twitter:

Would such a scheme be suitable for Canada? My inclination is No. Why? Because we do not share essential features with EU countries to make it worthwhile.

It is first important to note the VAT revenues in EU countries like Slovakia and Portugal are much, much more important source of government revenues than they are here in Canada. This is because their rates are higher and their coverage much broader. Because these countries are so reliant on these revenues, they are much more willing AND ABLE to adopt schemes such as the tax lottery.

The second feature of note is that, unlike Canada, EU countries measure their tax gap and know how much revenue they are losing from VAT noncompliance. You need to know how much revenue you are losing to figure out how much it is worth spending on compliance.

The third thing to note is that you also need to know the main features of tax noncompliance in order to devise a scheme that overcomes them. Is the EU, many more purchases are made with cash than with credit or debit. In Canada, we like our credit and debit and receipts are a natural outcome of this preference. When receipts are not issued, it is typically an agreed upon arrangement between the provider and consumer where the savings are of a magnitude that would not be overcome by a lottery. I say this because we would not be offering $10,000 as winnings given the above. Probably more like $100.

So the tax lottery idea is an interesting one and am looking forward to seeing it play out in the EU, but don’t expect it here in Canada anytime soon.

A Framework for Tax Analysis

I am back to work after my maternity leave and thought I would kick off this new era with a post off with a bit of a tax education piece. I am often asked about how do economists assess taxes and tax systems? How do we choose between different taxes and tax systems? How do we choose between different tax structures?

Well economists have a set of criteria that we use to make our assessments. We typically judge the efficacy of a tax system according to four widely accepted criteria: Equity —“fair” distribution of burden which is usually measured by vertical and horizontal equity; Efficiency—minimize the deadweight loss which is usually driven by elasticity and size of tax; Economic growth—does the tax encourage and support economic growth; and administrative costs—minimize collection and compliance costs.

EQUITY: Most agree that the tax burden should be distributed fairly, that all of us should pay our “fair share.”  However, there is endless debate about what constitutes a fair tax system.  There are essentially two leading theories on which to describe the “fairness” in a tax system. The first is the benefits-received principle. The second is the ability-to-pay principle. I have written about equity in detail before and I refer you to that post for more information.

EFFICIENCY:To economists, efficiency simply refers to the use of resources so as to maximize the production of goods and services. We know that taxes distort economic decisions, they impose burdens, and the excess burden refers to the amount by which the burden of a tax exceeds the total revenue collected.   These are also called dead weight losses (DWL-oddly the name of my softball team when I was doing my PhD).  However, that taxes can actually improve the market outcome.  E.g. Externalities, public goods, etc.  In these cases, taxes reduce the DWL.  This occurs when the market outcome is initially inefficient. Knowing when taxes are good, bad, and in between is vital when designing tax policy.

ECONOMIC GROWTH: The third criteria to assess taxes are their effect on economic growth.  Do taxes encourage or discourage economic growth?  We know that the more developed a country, the larger the government, and the greater the amount of revenue collected via taxes.  So there is a positive relationship, but since taxes distort behaviour, they also reduce growth. For example, taxes go to pay for essential services required to support economic growth such as roads, police, clean water and safe food, the legal system etc.  But taxes also create disincentives to economic growth.  For example, income taxes reduce the willingness of people to work additional hours, to accept risk inherent in investment since gains are taxed, and create “red tape” e.g. the GST on businesses. The key is that taxes are required for economic growth, but they must be carefully balanced and designed to minimize the DWL associated with them. I have written about taxes and economic growth before.

COST: The administrative burden/cost of taxes is part of the DWL of the inefficiencies created by taxes.  This includes time spent filling out forms and record keeping as well as resources to administer and enforce tax laws. Cost could be reduced by simplifying the system.  Simplification, however, can jeopardize the other components of the tax system that we have looked at.  That said a 2800 page Income Tax Act is probably quite inefficient though! One of the costs of taxation that is often overlooked is that of tax avoidance. An individual rightfully go to great lengths to avoid taxation but in most cases these results in deadweight loss as well as inefficiencies.

So there is our big secret. This is how economists assess taxes. And now you can too.

Medical necessity, Infertility, and the Taxpayer

Since Ontario’s announcement to fund one round of IVF treatment costs, there have been a number of articles written how this procedure is not medically necessary and should not be covered by taxpayers. There are things, though, that you should know before jumping on this band wagon.

The Canada Health Act provides for the transfer of funds to the provinces for their health care insurance programs for services that “are medically necessary for the purpose of maintaining health, preventing disease or diagnosing or treating an injury, illness or disability.” The Act, however, does not define what it means by medically necessary services. Instead, what is deemed to be medically necessary is defined in each province.

The medical community, backed by the World Health Organization, recognizes and defines infertility as a disease. Because it is defined as a disease, diagnostic and management of the disease is medically necessary in their opinion. This means that the failure to cover IVF is not a medical decision but rather a policy decision.

As we all know, Quebec considers IVF to be medically necessary and covers 3 rounds of IVF.

Ontario already considers IVF to be medically necessary; it just limits the procedure to some forms of infertility. In fact, Ontario used to cover IVF treatments until 1994. What happened was in 1993, the Royal Commission on New Reproductive Technologies showed that IVF was a medically proven treatment for women with blocked fallopian tubes and urged provinces to cover IVF treatment costs for these couples. It also recommended the IVF be provided for other forms of infertility and to continue to assess the effectiveness of this treatment in these cases. Ontario, in the face of sharp fiscal constraints at the time, used this decision to limit its coverage of IVF to only these women.

Of course, since 1994, IVF has been proven to be an effective treatment in the face of many causes of infertility. So much so that the Expert Panel on Infertility and Adoption recommended in its 2009 report that IVF be covered by the province. This recommendation, however, was ignored. The result is that Canada is one of few developed countries that does not fund infertility treatments. Currently, 15 US states have mandated fertility coverage by private sector providers and even providers not in these states will cover many fertility treatments, including IVF. You will find in their policies some statement that says that ART procedures such as IVF are considered both medically necessary for women with infertility and have been proven effective. The UK, Sweden, Australia, France, New Zealand, and Israel, to name a few, all provide IVF treatments to its citizens under a certain age. In fact, Israel is the world leader in IVF, with the highest rate of IVF in the world.

It is interesting that despite most provinces not funding IVF, it does fund many of the supporting costs associated with IVF, including diagnostics (like HSG, semen analysis, endometrial biopsy, various blood work, monitoring, etc.). In addition, many infertility treatments are already covered, including attempting to unblock fallopian tubes and embolization of varicocele. The result is that the out of pocket expenses from IVF is nowhere near as high as it is in non-mandated US states. In addition, it means an interesting state where some couples infertility is treated and managed through the provincial medical plan, whereas others are not. This leads to some interesting questions like: Why is varicocele embolization, the sole purpose of which is for fertility, considered medically necessary as a treatment for infertility, despite the lack of medical evidence as to its efficacy, but IVF is not, despite the abundance of medical evidence in support of its efficacy? Better yet, why is a vasectomy considered medically necessary? And more ironically, why is a woman with two blocked fallopian tubes allowed IVF access in Ontario but a women with one 100% blocked tube and the other 95% blocked, not?

The advantage of provinces considering IVF to be medically necessary as it means the treatment can be covered through the provincial health care plan. Something that Ontario has not yet actually committed to. The other route is to skirt the medically necessary debate and instead over financial support through the tax system. This is exactly what the Government of Canada and the Government of Manitoba does.

The Government of Canada allows the expenses incurred for IVF (actually all ART procedures) to be claimed through the medical expense tax credit, including both the procedure and fertility medications. This is a nonrefundable tax credit (valued at 15%), the caveat being that only expenses above a threshold are covered. The threshold is the lessor of $2,152 or 3% of net income. That is, if you earn less than $71733.33, you can claim a larger portion of your medical expenses. Median income in Canada is about $32,000. All medical expenses within a household can be pooled and claimed by just one taxpayer, preferably the one with the lowest net income but not so low that they are unable to benefit from the nonrefundable nature of the tax credit. Assuming that a round of IVF costs $10,000, the minimum level of taxpayer support for these expenses is $1,177.2. Since most claimants earn less than $71,733.33 it actually means most couples obtain much greater taxpayer financed support. I have yet to see those arguing against IVF under a provincial medical plan arguing against this taxpayer financed support.

The province of Manitoba also offers a Fertility Treatment Tax Credit. Manitoba covers 40% of the cost of IVF and related ART procedures to a maximum of $8000. Again, assuming that a round of IVF costs $10,000, Manitoba couples see an additional $4000 in support for their expenses.

The province of Quebec also have a medical expense tax credit but it is refundable. This means that those that obtain IVF treatments through the provinces medical plan get an added bonus of claiming the costs of the fertility medications through this tax credit.

The result is a rather curious, nonsensical, contradictory, and confusing landscape related to taxpayer support for IVF and related fertility treatments. Perhaps rather than another haphazard leap into the environment, Ontario and the other provinces should think clearly about the medical coverage and taxpayer support for infertility as a whole and bring a more cohesive response to this issue.

Ontario’s premature IVF announcement

On Thursday April 10, 2014 Ontario made the long awaited announcement that it was going to boost its coverage of IVF. I say long awaited because the Expert Panel on Infertility and Adoption recommended that it do so in its 2009 report.

What Ontario announced was that it will now cover the procedural costs of one IVF round for all infertile Ontario residents. An advisory panel will determine how much each ‘couple’ will receive as well as who is eligible. Other than that, little information has been provided. It is not known at this time if the funding will be through the provincial medical plan, through a tax credit, or other vehicle. It is also not clear if the province will require a single-embryo transfer in exchange for the funding in order to reduce the risk of multiple births.

Due to the lack of details, it is not clear what the policy rationale for this proposal is. In addition, given the lack of decisions made regarding the implementation, the proposal appears to be ill thought out and the announcement made prematurely. That is, it was an announcement for announcement sake. That is the kind of policy that I hate.

The overall live birth rate per IVF cycle started is 24% in Canada (note that the success rate for natural conception is 25% in fertile couples). So if the oft quoted figure of 4,000 couples that will benefit from this policy is true (assuming this is an annual figure, but again not clear), then we expect it to lead to 960 live births per annum. The Ontario government expects to pay out $50M annually, meaning, ceteris paribus, that each live birth will cost Ontario taxpayers $52,083.

Normally, we expect to see some tradeoffs on the part of infertile couples like was done in Quebec. In exchange for partial funding, the ‘couple’ must agree to transfer only one embryo. This quid pro quo reduces the costs associated with multiple births, thereby saving the province the cost of high risk multiple births. This was what was done in Quebec. Quebec funds three rounds of IVF in exchange for a single embryo transfer and its multiple birth rate dropped from 27.2% to 3.8% within the first three months of the programs implementation. The costs saved from lower multiple births exactly offset the cost of the program, meaning a zero sum game for Quebec taxpayers..

However, the industry itself has already been moving towards more single embryo transfers on its own, even without cost sharing, due to the medical risks. Canadian fertility clinics reported a decrease in the multiple birth rate from 32% in 2009 to 18.4% in 2012 (note the natural rate of multiple births is about 2%); however, how much of that drop is due solely to Quebec vs. adherence to the recommendation by the Canadian Assisted Reproductive Technologies Register (CARTR) of a single embryo transfer for women under the age of 35 is not reported.

So it is not clear if Ontario’s motivation for this policy is to reduce multiple births, but if it is it needs to mandate single embryo transfers (it also needs to better regulate the industry, but that is a whole other kettle of fish). But if it is, then why is it funding just one round of IVF treatment? The pregnancy rate from one round is low (equal to that of the natural rate among fertile couples). Most couples will need a second round and even third round (either a fresh round or transferring frozen embryos from a previous fresh round), and without regulation related to the number of embryo’s transferred in these subsequent rounds, the risk of multiple pregnancy rises with each round as each round increases the incentive to transfer more and more embryos to achieve a successful pregnancy. The recommendation from the Expert Panel on Infertility and Adoption was to fund 3 rounds, with the live birth rate from 3 rounds being 70% for women under 35 and about 60% for those between 35-40.

The policy is also not consistent with evidence related to achieving a successful pregnancy from IVF. Evidence shows that the highest success rate from IVF occurs in rounds where the frozen embryo’s are transferred and where the uterine lining has been ‘scratched’ in the cycle before the transfer. If Ontario wants to increase the live birth rate, thereby reducing the cost of each live birth, then it needs to focus on matching its policy to evidence on success rates.

How the funding will be delivered is also important. If the goal is to make fertility treatments for affordable to those who might not already be able to afford them, then a tax credit does not meet this test. A tax credit requires the participants to pay the costs out of their pocket and then seek partial reimbursement at tax time. They need to have the money on hand first and foremost and be able to carry that expense until they are able to obtain the tax refund, which can be more than a year and half from the time they incur those expenses. Given that the average cost of a single cycle of IVF is $10,000, including medications, this is no small sum to incur.

Which leads to the other cost problem. The Ontario policy will only cover the cost of the procedure and not the cost of medications. Typically, the procedure runs around $5,000 and the required medications amounting to around an additional $5,000. Most private health plans exclude fertility medication from coverage, the exception being many public sector workers for whom these expenses are covered (again, a whole other kettle of fish).

So it is not clear that the policy will help increase access to IVF treatments or whether it will subsidize the costs for those that are already willing and able to pay for the treatment.

While many are passing judgement on this policy as not being needed, saying there are more important costs to cover in Ontario, I will not jump on that band wagon. Infertility is recognized by the medical community as a disease of the reproductive system. This disease affects between 1/6 and 1/8 couples of child bearing age and most infertility is an exogenous condition. Our medical system happily treats, at taxpayers cost, diseases and conditions that are brought on by the behavior of the individual, such as smoking, drinking, obesity, and so on as well as the costs associated with tubal ligation and vasectomies that arguments such as these against IVF funding are repugnant. That said, Ontario’s policy needs much more thought and clarity before it can be assessed as being a good idea or a poorly thought out policy with good intentions.

Why we don’t need income splitting

The discussion on the merits of income splitting seems to continue to be rampant and we can expect much more of this debate over the coming year as Joe Oliver just indicated that the focus of the next budget will be on tax relief for ‘hard working’ families.

While Minister Oliver did not say that this meant income splitting, there seems to be much anticipation in certain quarters that this policy (income splitting for families with children under 18) will finally get the go ahead in next February’s budget.

However, the issue is not as clear cut as some people would have you believe. Proponents of the policy say that families where one spouse works pay more tax than if that same income is earned by two individuals. They say that these families are equivalent and should instead pay the exact same tax.

The trouble is that this statement, much like that levied by Andrew Coyne, is that it is only examining the bias in the ‘statutory tax rates’ and is suggesting that two very different households are in fact the same.

Let’s look first at statutory tax rate bias. Our income tax rates are progressive which means that, is essence, the more you make, the more you pay. At the federal level this means the following

  • The first $11,138 is taxed at 0%
  • Between $11,138 and 43,953 is taxed at 15%
  • Between $43,594 and 87,904 is taxed at 22%
  • Between $87,905 and $136,270 is taxed at 26%
  • Income amounts over $136,270 are taxed at 29%

By just looking at statutory tax rates, then yes someone earning $100,000 does indeed pay more tax than two people earning $50,000. In fact, considering only federal taxes for ease of discussion, the sole earner pays about $4,193.64 more in federal income taxes.

But we should all know better than to just take one aspect of the tax system and not consider the system as a whole. As there are ways in which the tax system attempts to rectify that disparity. First, there is the spouse or common-law partner amount. If a person’s spouse earns less than $11,138 then they get to claim the spousal amount of $11,138. What this means is an additional tax benefit of $1,671. This reduces the tax difference between themselves and the dual earners to only $2,522.64.

Which turns us to the second point. These households are not the same. Let’s actually remember that the sole earner family is actually comprised of two working spouses. One happens to work in the observed labour market and the benefits from that labour is taxed. The other works in home production and we have decided that the benefits from that labour be untaxed. This household is deriving benefits from someone maintaining the house and engaging in childcare, but those benefits are not taxed. The tax savings from this feature of our tax system, I assure you, are in excess of the differential remaining. In other words, the sole earner family is actually better off than the dual earner family.

The dual earner family is also not as well off as proponents of this policy leave you to believe. The dual earner family is paying payroll taxes not accounted for in the calculations levied by proponents. Dual earner families have far less time available to other activities than the sole earner family. Dual earner families have to pay for child care (yes there is a tax credit, but this tax credit does not come close to offsetting these costs).

The bottom line is that these families are not the same and should not be taxed the same. Worse yet, our tax system already benefits sole-earner families. To implement income splitting for families will only worsen the inequality. Dual earner families should be protesting this proposed policy as exacerbating inequality. People without children should be wondering why this issue is only relevant for those with young children.