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.