Once the federal budget is balanced, the Harper government plans to introduce income splitting: allowing couples with children under the age of 18 to shift up to $50,000 a year in income to the lower income spouse for tax purposes. What does that mean for Canadian families?
The argument for income splitting is that couples with one spouse who makes significantly more than the other pay a higher overall tax rate than couples with relatively similar incomes. For example, a family where one spouse stays home with no employment income and the other makes $100,000 a year pays more in income tax than a family where both spouses earn $50,000, because of our progressive income tax system. The system is considered unfair by some, and a disincentive for parents to stay at home.
If the federal government can afford to reduce taxes on families so one parent can stay at home with the kids, what’s not to like?
Plenty, it turns out.
If all taxes, payroll deductions and working expenses are included, there is little difference in the overall tax rate paid by families with the same overall income. If child care expenses are included, any tax advantage for the two-earner couple disappears for most incomes, as a report by the C.D. Howe Institute showed. Income splitting would replace a system of relative equality with one where single earner high-income couples have a big advantage.
So how much would it cost? And who benefits?
The Conservatives’ proposal would cost the federal government $2.7 billion, and it would cost the provinces another $1.7 billion annually. Those figures are only if it’s limited to families with children. If extended to all families, as Ontario Conservative leader Tim Hudak has proposed, the annual cost rises to $5.6 billion for the federal government and $3.5 billion for the provinces. That’s over $9 billion, and costs would certainly rise as more families took advantage of the scheme.
And here’s the kicker: 85 per cent of Canadian households wouldn’t benefit at all. Single individuals, single parents, couples with children over 18 and even couples with children under 18 with incomes in similar tax brackets wouldn’t benefit.
As the diagram shows, only families at the very top of the single earner income scale stand to benefit significantly, with those earning more than $200,000 a year benefiting the most. Sounds like a familiar refrain from the Harper government, doesn’t it?
Income splitting is terrible policy that would have negative economic impacts. It provides little for parents who need help, while lining the pockets of those who don’t. There are plenty of more equitable ways to support families raising children that could also benefit economy.