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.
Dead For Tax Reasons 
I make 120K, my wife makes 20K, we live in an expensive city, we have 2 kids, neither of us can afford to quit work. I just did a tax calculation on a hypothetical couple who make $70K each, have 2 kids and neither can afford to quit work. Your math does not work, I see them as much better off than me. Your logic is kind of complex and I wonder if you can simplity it by referring specifically to my situation. I live in Ontario. Are you suggesting my wife quite work and then I imagine I am paying her and be thankful I don’t get taxed on her free labor?
My math indeed ‘works’. My ‘math’ is for my hypothetical couple. You can do any calcs you want with the CRA payroll calculator. http://www.cra-arc.gc.ca/esrvc-srvce/tx/bsnss/pdoc-eng.html. I don’t see how you could possibly interpret the post as me saying a secondary earning spouse should quit their job.
However I still feel you are saying I do not deserve income splitting :=) I just feel that my family should not have to pay more tax than the other family who makes the same combined income. If our final taxation (after all credits) was equal I would be more than willing to have both our taxes increased equally to help out others (and I probably agree with you generally on who deserves assistance). Right now, I just feel I am supporting worthy causes more than the other family
Sorry if you recieved another message from me just before this, I forgot to enter my name and e-mail and then could not retrieve the screen.
PS. My family and I are doing a road trip this summer and will spend a few days in Victoria, it is a beautiful city and I have an old friend there,the kids will also love it
You are falling into the trap of “statutory tax rate bias”. There is more to the comparison that just comparing statutory tax rates.
I still do not feel understood. Family A 120/20 Family B 70/70, both partners work and both families have 2 kids. I haven’t fallen into any analyis trap and am all for progressive tax rates. My only question is why is it fair A has lower net income. I also agree that is unfair and more pressing that there are a lot of families making way less than 140. I guess I feel there is unequal treatment between A and B, but perhaps there are more pressing social inequities to correct, is the way I see it.
PS I didn’t know associate professors got paid 130K, are you at the high end, do you get bonus on top of that? I was planning to go into doctoral studies (my professors were encouraging me) but I thought I wanted to go into industry to make more money
I guess a more general discussion might be unequal earners rather than dual vs single income earner? My family is the former and your example is more the latter
This income splittiing debate confuses me. You are obviously a highly regarded and intelligent person. I have been known to not be a total idiot. However there is something missing from the discussion. Yes, there are hypothetical/real situations where it can be argued that income splitting will be a windfall for some rich person (marrying just to lower their tax) or that a couple is not truly better off if income splitting were introduced (your hypothetical example with stay at home spouse providing tax free benefits). However, whenever I ask people who are against income splitting about my particular situation (which I am sure is quite common), I get no answer.
My situation is that I make $120K and my wife makes $20K, for a combined income of $140K. Another couple make $70K/$70K for a combined income of $140K. What is the argument/rationale for why this is right? I am not against helping people/families who are in situation worse than I am, I am not even saying I am in a bad situation, all I am saying is that I am not being treated fairly relative to the other same income family.
You may be glad to hear this, but this is my last e-mail to you if I do not hear back, I certainly do not want to become a pest. However, this will be disappointing because I am confused and was hoping you could get me to see exactly why income splitting is so wrong. I am open to sensible/balanced arguments/discussions and am even prepared to change my view based on these
Sorry, edit to last note:
I said “couple is not truly better off if income splitting were introduced (your hypothetical example with stay at home spouse providing tax free benefits)” as your example
Probably it more accurate to say “couple with single income already gets a tax advantage through free labor that is not counted as a taxable benefit” is your example, but that is not my situation
Nothing better to do on a Saturday afternoon except study your literature! I just saw this “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 credi t does not come close to offsetting these costs)” said by you.
I am a dual earner family at $120K/$20K (A), my example other couple is same family income at $70K/$70K (B). Referring to your paragraph above, we are both dual earner families, my family A is paying more payroll tax than B, my family A has same amount of time avaialable as B for other activities, my family (A) has to pay same amount of child care as B. So why is it fair that we pay more tax than B, that is my puzzle! Please help me!