Tax lessons from the U.S.

Obama delivered his 2015 State of the Union address on Tuesday and it included a lot of very interesting tax measures, many directed towards taxing wealth. Kevin Milligan nicely summarizes one such measure, which is an end to the stepped-up basis ‘loophole.’ I think he is quite right to note the importance of this move.

But there is one element in the proposals that has not had much discussions, even amongst income splitting advocates in Canada, and that is the new $500 ‘second earner’ tax credit. In case you were not aware, the US taxes on the basis of the household as opposed to the individual system used in Canada. This means that households that earn the same income, regardless of how that income is earned across spouses in that household, face the same tax rate, ceteris paribus.

The new tax credit though takes aim at this, and takes direct aim at the arguments levied by income splitting advocates in this country. This new tax credit reduces the taxes owed by low and middle-income married couples with two workers. The stated purposes of this tax credit is to help defray the extra costs incurred by married couples where both partners work, one argument frequently levied by opponents of income splitting.

Since many income splitting proponents oddly refer to the US for justification for income splitting (I say oddly because the comparison actually would mean that dual earners should pay more tax rather than sole earners paying less tax), this new tax credit and its justification really throws a wrench into their argument machine. The new tax credit reinforces what many in Canada have been saying: having two working spouses imposes costs on the household not absorbed by sole earners.

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2 thoughts on “Tax lessons from the U.S.

  1. It’s a very small wrench indeed. US 2-earner couples have zero tax advantage over 1-earner couples, while in Canada they may have a 5-figure advantage. Yes, that’s just on the tax side, and the 2-earners incur additional costs, but the question is, what is a fair amount to compensate them? Do we *need* to compensate them.

    It’s a question of scale. If you and your spouse bring in $150K, and I bring in $150K and my spouse is at home, should you have a $15K lower tax liability, especially since both families will qualify for IDENTICAL benefit payments and tuition loan eligibility? The gov’t doesn’t CARE who earns the money when it comes to determining the need for benefit payments, so should it care when it comes to calculating tax liability?

  2. The same ” imposes costs on the household” argument applies even to the first income (transportation, clothing, meals) for which there is only a $1,000 credit available to salaried folk.

    Please explain why the 2-income household is entitled to a $10K (or more) reduction in total taxes, at incomes > $100K.

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