Jim Flaherty wants more analysis of income splitting

Here’s a start from economist Kevin Milligan

Finance Minister Jim Flaherty’s post-budget comments on income splitting have created a large stir. (See John Geddes here.) The Minister has questioned the distribution of benefits of his own party’s income splitting proposal, noting that “…it benefits some parts of the Canadian population a lot. And other parts of the Canadian population virtually not at all.” According to reports, the Minister also called for more research on income splitting, saying “I think income splitting needs a long, hard analytical look.” In a blog post, I’m not able to offer a deep analysis. Instead, here’s a backgrounder to catch up on some of the key points in the debate.

First, the details of the policy proposal. According to the 2011 Conservative Party of Canada election platform, the Conservatives propose to allow up to $50,000 to be transferred from one spouse to another for families with children under age 18. The reason this is potentially beneficial is that income in different tax brackets faces different tax rates. For couples that have the same income, swapping income back and forth brings no benefits since that income faces the same rates either way. On the other hand, when one spouse is in a high tax bracket and the other is in a low tax bracket, the tax savings can be substantial.

Is it unfair for couples with the same total income to face different tax burdens? Alexandre Laurin and Jonathan Rhys Kesselman address the fairness issue here, in work put out by the C.D. Howe Institute in 2011. One of their main concerns is that a couple with a stay-at-home spouse benefits tremendously from the untaxed ‘home production’ of that spouse, and this should be taken into consideration when comparing across two-income and one-income couples.

This is easier to understand if you imagine a couple with two earners both making $50,000 compared to a couple with one earner taking home $100,000. In my experience, the two-earner couple has a much more stressed and difficult lifestyle because of the need to co-ordinate childcare, shopping, meal-preparation, laundry, and other daily household tasks. The single-earner couple, on the other hand, has a full-time household manager taking on those necessary and demanding daily tasks. That makes life easier for the single-earner couple, and the basic comparison across the two couples with the same total income less straightforward.

On the other hand, Jack Mintz makes the case for the unfairness of differing tax treatment for couples with the same total income here. Mintz expands on his thoughts with a few new twists here, in work with Matt Krzepkowski. They propose to change the way couples can share tax credits in order to partially compensate for the extra economic value received by households with stay at home spouses. (Krzepkowski has more details and simulations in the Canadian Tax Journal here.) As I understand it, their proposal wouldn’t fully account for the differences in home production, but would take steps in that direction.

The other large concern about income splitting is the distribution of the benefits–who gets what. The recent report from the Canadian Centre for Policy Alternatives looks closely at this concern. (Also, a somewhat cheeky presentation of the same point by the Broadbent Institute on ‘Mad Men Giveaway.’)

Below is a chart of my own analysis of this question. Along the front axis of the chart is the income of the primary earner, and the back-and-front axis shows the income of the secondary earner. The height of the bars shows the estimated federal tax savings. These savings are very high for some couples. For example, a couple with a $200,000 earning spouse and a $0 earning other spouse would save $6,489 under the 2012 tax rates. In contract, a couple with a $50,000 earning main spouse and a $25,000 earning spouse would save only $511. It seems clear that the distributional concerns raised by the CCPA and others about the 2011 Conservative proposal are based in fact.

Federal Income Splitting Simulations

Federal Income Splitting Simulations

There are many other concerns raised about income splitting which I can’t address in one blog post. These range from the impact on the work incentives of second earners, to changes in the balance of negotiating power within households (see Elisabeth Gugl), to problems generated by taxing people for income earned by others (see Lisa Phillips or Frances Woolley). For more background, Frances Woolley has a blog post on the history of income splitting proposals.

At this point in the debate, here’s how I take stock of the arguments. There are serious points on each side of the ‘fairness’ case for different treatment of one-earner and two-earner couples with the same total income. Proposals like the Krzepkowski-Mintz “tax credit sharing” idea deserve some consideration and further analysis to see how well such adjustments could close the gap between the two sides of the debate. However, even if the case for ‘unfairness’ can be made, a larger issue is one of priorities. In 2015 if there is $2.5 billion available in some kind of “unfairness-fighting envelope,” how should this particular tax-splitting proposal rank relative to the other injustices in our society that could be remedied through the tax system? Moreover, if your actual goal is to help families with young children, existing tools like the Canada Child Tax Benefit might give a more equitable distribution of the benefits. The Finance Minister’s wish for more analysis sounds like a good call to me.




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Jim Flaherty wants more analysis of income splitting

  1. Nahh not a good idea. Unequal earners win, equal earners get nothing. Just increase child tax credits for everyone if you want to help families.

    • Equal earners are already splitting their income in the most tax-efficient way possible. Joint filing just removes the inequity caused by having highly differential incomes within the household.

      • but joint filing isn’t income splitting. if you were joint filing, the lower income would be taxed at a higher rate because it would be added on to the other income.

        Which nobody is proposing.

        • Now you’re debating semantics. It is often called joint filing. Joint filing allows income splitting.

          • Joint filing is not income splitting. We are taxed individually in Canada, unlike the United States. This is not a matter of semantics, they entail very different things.

  2. Just do a flat tax already. 20% across the board and be done with it. All these tax rules only benefit the rich anyways because they are the only ones who know how to claim this stuff. On paper they are taxed more but in reality everyone I know with a lot of money pays much less tax because they can afford someone to find ways around these convoluted systems. 90% of people who these tax breaks are supposed to help never know how to claim them anyways.

    • This statement is idiotic. What’s the logic? The social-con plan is trickle-up economics, so why not implement an even worse version?

      The real problem is that the Harper Conservatives are terrible economic managers. They use policy to target votes instead of economic performance.

      The Trudeau Liberals should vow to clean up this mess by restructuring the tax system. They can get rid of the failed tax policies — Harper’s extraneous corporate tax cuts, GST tax cuts, TFSAs, boutique tax cuts — and with the savings — $44B/yr, no less — cut personal income taxes for the middle class and working class. (That and increase social spending to effectively meet goals like increasing youth participation in sports, arts, etc.)

      Crunch the numbers and the Liberals could offer voters real tax savings that is beneficial to the economy. Why the Cons prefer high middle-class income taxes is beyond me. It’s as if they purposely choose to make the worst possible policy decisions…

      • The whole point of the simplified flat tax is precisely to eliminate the rich from being able to dodge taxes though write offs and other tricks. The more complicated you make the tax system, the more places there are for people in the know to hide money. Do you actually think that the rich will pay higher taxes??? Bahaha they didn’t get that way by paying tax!!!

        • We have a working example in AB. And it isn’t working out too well. One way or another flat tax schemes seem to leave large revenue holes that never seem to be compensated for by the extra volume of actual tax payers at the top.

          • Wow I must have lived in a different Alberta than you.

          • I don’t claim any expertise, so you’re welcome to prove me wrong. From time to time you hear rumours of AB abandoning the FT. Good luck with that once it’s taken root. I don’t have an ideological predisposition against, not much anyway. Coyne makes a convincing case for it. As a pragmatist I’d say fine if it works and its fair( doesn’t hurt the poor) but I’ve yet to hear of a good working model,
            Doesn’t bother you that a province as blessed as AB is always flirting with deficits or budget short falls, and never planning for the future?

        • This is more bad logic. The rich are supposed to cheat on their taxes, so why not just cut their taxes even more! Save them from coming up with new ways to cheat!

          • The point is that the poor are not taking advantage of these tax incentives because they dont understand them! Do you really think they are investing in RRSPs and tax free savings and making tax deductions on everything they are entitled to? Of course not! The few people who understand it pat themselves on the back and the poor pay anyways. Besides I have no prejudice against the rich. They owe me nothing.

          • Maybe Ron if you spent more time working and less time trying to find fault with the system then perhaps you would have money too!

          • I learned a long time ago that only a person who has money to spare can use his money to make money. If all of one’s earnings must be put toward living expenses there’s no opportunity to save or invest. Perhaps a lot of people would love to contribute to RRSP’s and TFSA’s, and be better off for it, but they can’t. Maybe if their tax rates were lower they could make use of those tools? Income splitting doesn’t help those people reduce their taxes.

          • Those with money to spare have good jobs. Getting 200$ extra back from a marginal decrease in taxes does nothing.

          • Are you suggesting that because the double-income families can’t be helped significantly they shouldn’t be helped at all, and that we should instead help the people with good jobs reduce their taxes so that they have even more disposable income?

          • No I’m suggesting that pretending that these little changes have any real effect on a family is skirting the problem. The over complicated tax system is only advantageous to those that understand it. I was oversimplifying the solution of a 20% flat tax to simply highlight its inherent advantages. It might be 15% or there are capped flat taxes that are flat under say 100,000 per year. The whole point I’m trying to make is that NOBODY really understands how we are taxed. The guy who does my taxes for a living misses things all the time. The things that are supposed to make my life easier. The rich simply exploit these loopholes.

          • On that we can agree. The simplest solution to a problem is often the superior one.

            I do feel for the hard-working couples that bust their tails to build a better life for their children but are swimming against the current. To someone who lives pay cheque to pay cheque $200 is a big deal.

          • I’m not against a graduated tax system, I simply like to indulge in the guilty pleasure fantasy of actually knowing what I’m being taxed. I dont like things you have to know about or apply for or have an accountant explain to you. If they want to help the poor just say instead of paying 20% minus this child benefit (if you apply for it) and this sports equipment deduction (if you know about it) then we are just gonna charge you 16% instead. And to the rich instead of saying we are gonna tax you 50% but you can write off your business expenses, investment losses, RRSP contributions, charitable donations etc. Then we will just charge you 40%. The way it works now is that the poor pay more cause they just dont have the knowledge to get the deductions.

          • “Besides I have no prejudice against the rich. They owe me nothing.”

            I have no prejudice against the rich. But even Adam Smith (father of free-market capitalism) favored a progressive tax system. Our tax system has become regressive over the past 30 years. The rich pay a less percent in taxes than any other group, including the poor. These absurd trickle-up economics are destroying the economy.

            CBC: Canada’s tax system less fair than it used to be, study says
            “By the centre’s calculations, the top one per cent of Canadian families — those earning at least $266,000 — paid 30.5 per cent of their income in taxes in 2005. That was less than any other income group — even the lowest.”
            http://www.cbc.ca/news/business/canada-s-tax-system-less-fair-than-it-used-to-be-study-says-1.674168

          • If you are going to keep proving my point that regardless of the graduated tax system we have in place the rich take more advantage of it because of the complexity then I’m just going to stop posting on here.

        • A flat tax doesn’t get you where you want to be, eliminating credits and deductions would.

  3. Income splitting is merely another way of implementing a flat tax rate, or at least a flatter one. It would at least partially offset the effects of a graduated tax scale – effects which are presumably meant to add tax fairness. Is that what we want as a society?

    • Yes.

      • Yeah right. Like the 30% of hard-right conservative fundamentalists speak for the 60% super-majority opposed to this kind of nonsense.

        • Wait I thought you represented the 99%? Now it’s only 60%. What about the other 10%? I’m confused Ron.

          • The 10% are moderate conservatives. They can go either way on hard-right economic policies. The 60% is the voting block that was strongly opposed to Harper in 2011. In a democracy, the 60% forms the government, not the 40% minority.

          • Well Ron I hate to be the bearer of bad news but we don’t have a direct democracy system.

          • Actually, 96% of developed countries have democratic elections that ensure an actual majority is represented in government. None of them are direct democracies. The problem lies in our primitive 19th-century voting system most developed nations got rid of a century ago.

            Canada, UK: developed countries, undeveloped democracies
            http://democraticvotingcanada.blogspot.ca/2013/07/canada-and-uk-developed-countries.html

          • So if thats the system we had who would have been voted in? Just cause 60% voted against harper doesn’t mean they all voted in favor of someone else. Would we have a two party system then in order to make sure that only one person could have a majority vote? What if there were three candidates? Only two allowed then?

          • Democratic countries tend to have multi-party majority governments. These are actually more stable than our current system, First-Past-the-Post.

            There are basically two types of democratic voting systems: ranked ballot voting, which makes MPs earn their seats with a majority (same system all parties use to elect their leaders); proportional representation, which distributes federal votes so parties get the same percent seats they got in votes.

            PR was rejected in provincial referendums (although it is used by 85% of developed countries.) Our best bet is ranked ballot voting reform: there’s no reason voters should get saddled with politicians and governments they don’t want and didn’t vote for.

            PR: more stable government than FPP
            http://democraticvotingcanada.blogspot.ca/2013/08/pr-more-stable-government-than-fpp.html

          • Both of those systems you mentioned would end up with people they didnt want but I’m a different way. Maybe some people should just get over the fact that their guy isn’t going to win all the time. Thats life.

          • So it would be ok with you then that if your riding voted in an MP with a sixty percent majority but the province you lived in voted a total of 90% in favor of the conservatives that your riding should then be given to a conservative mp to make it proportional?? Haha you would be foaming at the mouth!!

          • The problem is not the system in this case its that those on the left side of the political spectrum can’t agree on a common vision and then they split their vote between the greens, NDP, bloc and liberals.

      • No.

    • So the richest 10% would only pay 45% of all income taxes instead of the current 50%?

      • I’m not sure your statistics are factually correct, but essentially the long-standing graduated income tax system is intended to work that way. There are merits to a flat tax system as well, not the least of which is simplicity. It seems to me that income splitting is just smoke and mirrors to maintain the appearance of a graduated tax scale that in reality isn’t as graduated as it used to be. Income splitting may help the people who deserve tax relief most, but not the people who need the most tax relief.

        • Progressivity would remain. Income splitting basically allows salary earners to do what business owners have always done – split income between family members for a more efficient distribution of income. If you allow families on salaries to do this, you still have a progressive tax system. A family with a 100-0 income split would then pay the same margin tax as a family with a 50-50 split, since the 100 could be split in 2 on the tax return.

          • I don’t disagree with your analysis or your calculations. The issue is, I think, that income splitting financially benefits the rather well-to-do, and not the vast majority of Canadians. We should ask ourselves if “fairness” should mean the rich get richer while the less-rich don’t? I believe that’s the essence of Mr. Flaherty’s musings on the subject today.

          • This logic is absurd. Do you think middle-class families are dual-income because they want to be? They have to be to pay the bills.

            There’s no reason why middle-class families should have to carry the weight of upper-class families who can afford to be single-income.

          • You’re the one who pines for the days when a family could be supported on one income. You’re as logical as Aunt Emily, but less articulate.

          • “You’re the one who pines for the days when a family could be supported on one income. You’re as logical as Aunt Emily, but less articulate.”

            Actually, I said back in the post-war era a factory worker could make it to the middle class and support a family on a single income. Over the past 30 years, right-wing policies have destroyed a great deal of wealth (and benefits) that workers had.

            No doubt, the cause of the high inflation in the 1970s was that wages were too high and labor was too powerful. But things were taken too far and now we’re back to economic conditions that existed during the Great Depression.

            The never-ending economic quagmire we are in is the result of too little demand (in the 1970s it was too much.) A middle ground needs to reached which will require a higher inflation target (4%) in the medium term. (The 2% target is entirely arbitrary in any case.)

          • Your logic is absurd. Many dual income families are dual income because they want to be. Why wouldn’t they be? Maybe when kids are under 12 years old it’s good to have a parent at home, but before that and after that there is no reason why a couple wouldn’t be dual income.

  4. If you want to benefit children, raise the child tax credit. If you want to benefit the poor, introduce refundable credits (i.e. pay them) with claw-backs for high earners, If you want to benefit the “working middle class”, introduce refundable credits on earned income only (you can exclude welfare, E.I. and investment incomes). Social conservatives like the idea of income splitting because it gives the appearance of encouraging “traditional” “Ward & June” types of arrangements, where on spouse is stay-at-home, but even for that questionable goal (with which I disagree, but if you wanted to), there are better and more straight-forward solutions – e.g. give a refundable credit to stay-at-home parents. You can spend as much or as little on any of the above by adjusting the amount of the credit, and it is much easier to tell who benefits from the change.

    • You do realize that all those credits exist already right?

      • The child tax credit exists, that’s why I said “raise” it. Currently
        low earners benefit from NON-refundable credits, which do not benefit
        people earning less than the basic deduction or are zero-earners.(Except
        for the HST refundable credit, which alleviates a tax collected by
        another means, you can deduct your income tax to zero, but you can’t
        make the government write you a cheque, and certainly not for being
        poor, per se). We do not currently have a credit applies to earned
        income (i.e. income from actual “work” that excludes non-work income by
        the very rich or very poor, although it was not my suggestion that we
        should exclude welfare recipients from government rebates, I merely
        cited a means to do so). We certainly do not have a current refundable
        credit for stay-at-home parents specifically targeted to that group, per
        se.

        –My point was merely that the government should be more
        transparent about who it wants tax changes to benefit, as all tax policy
        by definition benefits one group over another, whether for good or ill.

  5. Thank you for a very good presentation.
    Oh, and Ms. Woolley’s contribution is, as usual with her,
    very useful.

  6. Thanks for the overview! One key argument is that income-splitting would increase inequality, which is something we don’t want to do. But regardless of the merits of income-splitting, the idea that we should be looking at spending the surplus on tax cuts after years of austerity is ridiculous. We need to stop front-line service cuts at the federal level, fill the holes in provincial budgets or spend on infrastructure, not to mention begin the major restructuring of the tax system and economy required to address climate change. Income-splitting pales in comparison.

  7. I have a progressive argument for income splitting. A recent study in the United States found that a big driver of the increase in inequality is assortative mating. High earners tend to marry other high earner, concentrating wealth even further. In fact, absent assortative mating, the US would be back to the egalitarian distribution of wealth we saw in the 1960s.

    Income splitting would *reduce* inequality by eliminating the tax advantages for assortative mating (since income splitting only saves money in instances where a couple make different amounts).

    • I’m sorry I don’t follow your logic. I agree that if assortive mating results in partners having roughly equivalent incomes then income splitting would have no effect on their net taxes. I fail to understand how something that has no effect would reduce inequality.

      • I think the point is that non-assortative mating would be more attractive to wealthier individuals due to their prospective tax savings.

        So, we could expect to see more high earning stockbrokers hooking up with Tim Hortons service people, or high earning female university professors getting together with rural bait-and-tackle shop owners. They would probably have a lovely time going to NASCAR races.

        • Tim Horton’s hires Temporary Foreign Workers. Marrying the wealthy would reduce the slave state that the Conservatives want.

    • Doubtful this would reduce assortative mating given it’s a marginal fact in pairing at best. High earners marry other high earners because that’s who comprises their social network.

  8. I’d rather not see the government pick favourites. With income splitting, with child tax credits, with credits of any sort, they are favouring one group of Canadians over another. I’d rather see earnings taxed at the same rate for everyone.
    Yes, it’s true that kids cost money, but it’s also true that kids are the beneficiaries of public schools, public parks, you name it.
    I’d rather not see the tax system used as a political tool. It’s not supposed to be about social re-engineering, it’s supposed to be about paying for the cost of government.

  9. I just wonder where single people fit in with all this. I pay the same property taxes, utility bills and house maintenance etc. as a working couple but there is no help for me from the government. I’m not taking away the need for family income splitting but surely a one income person also needs support.

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