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.