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The Family Tax Cut needs a rethink

Kevin Milligan breaks down three problems he has with the Conservatives’ income-splitting Family Tax Cut


 
Prime Minister Stephen Harper announces tax cuts and increased benefits for families at the Joseph and Wolf Lebovic Jewish Community Campus in Vaughan, Ont. (Nathan Denette/CP)

Prime Minister Stephen Harper announces tax cuts and increased benefits for families at the Joseph and Wolf Lebovic Jewish Community Campus in Vaughan, Ont. (Nathan Denette/CP)

The Parliamentary Budget Office released a report on the Conservatives’ income-splitting Family Tax Cut on Tuesday. The PBO report doesn’t break much new ground in reporting that the benefits will mostly go to those in the top part of the income distribution—that’s been analyzed by Rhys Kesselman here and here, the Broadbent Institute here, and in Maclean’s by me here and here.

Recently, economist Jack Mintz (in this Maclean’s video) and the National Post’s Andrew Coyne have pushed back against this kind of “who gets what” analysis, arguing that tax policy has other objectives beyond redistributing from rich to poor. For example, in some circumstances (as I’ve argued at Maclean’s) we care about efficiency and growth and need to trade that off against “who gets what”. Similarly, at the core of the argument in favour of income splitting is a concern with “horizontal inequity” between families with the same total income, but different splits of that income across spouses. Income-splitting on your tax form is meant to rectify this inequity. Because income-splitting rectifies that horizontal inequity, Mintz argues this should diminish the attention we might pay to the “who gets what” consequences. If “who gets what” were the end point of the analysis and criticism of the Family Tax Cut, then the Coyne-Mintz argument might hold sway. But I think there is more to criticize than “who gets what” when it comes to the Family Tax Cut. Here are three further criticisms:

The Family Tax Cut is complex.

The Family Tax Cut has been set up as a notional tax credit. In other words, we don’t actually transfer money from one spouse to the other. Instead, the new tax form performs a “pretend” notional calculation as if money were transferred between the spouses and sees what happens. The result of this notional calculation is then plugged back into your real tax form. This exercise takes 85 steps, which might bring joy to hourly-compensated accountants, but adds complexity and obfuscation for the rest of us.

We’re not comparing equals.

The core of the “horizontal equity” analysis is that a family’s total income should be taxed the same no matter how it is split across family members. In this view, a family with a $100,000-$0 income split should be taxed the same as one with a $50,000-$50,000 split. The challenge to this comparison comes from considering the hours of work inside and outside the home across these two families. The family with a $100,000-$0 split gets the benefit of a stay-at-home “household manager” to pick up kids from school, do housework and repairs, and generally make life easier and less stressful. If you think that a stay-at-home spouse is worthless, then the $50,000-$50,000 family is the same as the $100,000-$0 family. On the other hand, if you think having a household manager is valuable, then the $100,000-$0 family has an advantage and the simple comparison falls apart. And if this comparison falls apart, this erodes the motivation for the Family Tax Cut.

There’s confusion on work incentives.

An interesting twist in the new PBO report is their analysis of work incentives. On net, they estimate a drop in hours worked, equivalent to 7,000 full-time jobs. That’s pretty small in the context of Canada’s whole workforce, but it pushes in the direction of shrinking the economy. This impact reinforces the economic incentives of the Universal Child Care Benefit, which Laurier’s Tammy Schirle has shown lowers work among parents. Encouraging stay-at-home parenting over employment could be defensible as a policy choice, even if it might not be everyone’s cup of tea. However, at the very same time as the Family Tax Cut and UCCB push parents out of the workplace, we have seen expansions of the Working Income Tax Benefit and continued support for the National Child Benefit Supplement, both designed to get lower-income parents to work. Figuring out the policy direction here gives you whiplash—are we trying to support employment or at-home parenting? As I’ve pointed out before, it looks very much to me like our tax policy is trying to walk in opposite directions at the same time. Whatever your view on the “who gets what” analysis, these criticisms demonstrate that there are many grounds on which to suggest the Family Tax Cut needs a re-think.

(My disclosure statement is here.)

 

 


 

The Family Tax Cut needs a rethink

  1. The Conservatives have made tax policy more complex – it is ridiculous and, as so well laid out here and elsewhere, increasingly unfair. This is not what I elected them to do; this is why I will not be voting for them again, even if I have to ruin my ballot because there is no conservative alternative. This government has not been conservative in either sense of the word.

    • Perry Kraniel…..

      If you want a simple tax code, vote for the NDP or Liberals.

      NDP Code:
      How much money did you make last year?
      result: “Send it to us”

      Liberal tax code:
      How much money did you make last year?
      result: Give some to this guy…and this guy…and this guy….and her…and them, and after that, send the rest to ottawa.

  2. A few points.

    1. If the working out of income splitting is this complex then this is indeed a problem and should be simplified. But it hardly seems like such complexity would be necessary for its implementation (although why the government has structured things as they apparently have is a very good question) and is therefore not a convincing argument against the concept as a whole.

    2. Milligan writes: “The family with a $100,000-$0 split gets the benefit of a stay-at-home “household manager” to pick up kids from school, do housework and repairs, and generally make life easier and less stressful. If you think that a stay-at-home spouse is worthless, then the $50,000-$50,000 family is the same as the $100,000-$0 family. On the other hand, if you think having a household manager is valuable, then this simple comparison falls apart.” This is completely backwards. The primary reason for allowing income splitting is to “pay” the $0-earning individual in a, say, $100,000-$0 family for the work they do. In comparison, without income splitting the work they do is valued at $0. This is especially egregious when it comes to child care since the $50,000-$50,000 family can fully deduct all their child care expenses.

    3. As for the supposed confusion on work incentives, why should the federal government have a singular goal for more or less Canadians to work? Why shouldn’t it respect people’s choices? It’s ridiculous to say that the Family Tax Cut and UCCB “push parents out of the workplace”; no one is being forced to not work! Rather, these programs allow those parents who might like to not work but otherwise couldn’t to do so. The Working Income Tax Benefit and National Child Benefit Supplement, in comparison, give support to those with lower incomes to benefit more by entering the work force if they so choose. (And such an incentive is only one of the goals of the National Child Benefit Supplement.) While this doesn’t necessarily apply to Milligan, since I don’t know his political persuasion, I find it very strange that so many on the political left who are generally so critical of capitalism and the market economy are so horrified by the idea that the government could change the tax structure in a way to allow some parents to not have to work directly in it and thereby hurt the economy.

    Verdict: I’m actually ambivalent about income splitting. While I think it does potentially allow for a proper redress of a basic unfairness as to how two-income families are taxed, it needs to be structured in a such a way that it is both simple and doesn’t disproportionately benefit those with especially high incomes. One possibility would be to have a graduated amount that one could transfer, which would diminish as a couple’s total income grew.

    • “The primary reason for allowing income splitting is to “pay” the $0-earning individual in a, say, $100,000-$0 family for the work they do.”

      But as Milligan says, the family with a stay-at-home parent already benefits from that arrangement. The ‘Household Manager’ allows the family to avoid expenses (including daycare, housekeeper etc), gives the employed parent more time to work, and generally reduces stress on the household.

      Contrast that with a single-parent family (an example the Conservatives never talk about): the household requires all the same management and work, expenses are higher (again, daycare housekeeping etc) and the single parent has less time to work due to parental and household responsibilities.

      It simply makes no sense to create a $2.2B/year tax cut for the former and ignore the latter. Unless you’re a Conservative politician who wants to throw a bone to his “base.” This is terrible policy driven by cynical political motivations.

      • There’s no doubt that a single parent family has a tougher situation than a family with two parents. However, I think part of the response here has to be that there are already tax credits available for the expense of child care. Those credits aren’t available to a household where one parent is a stay at home parent. In the case where two parents are working, the new tax credit could provide the potential for one of the parents to work less and spend more time caring for their own kids. I’m not sure this tax credit is optimal public policy, but denying that it has any merit seems like sour grapes.

    • Thank you for pointing out where the analysis falls apart.

      If you believe a household manager has value then that provides the raison d’etre for the family tax cut.

      There are a number of advantages to the 50/50 family income versus the 100/0 income.

      • “Thank you for pointing out where the analysis falls apart.”

        Read it again. I listed the ways a household IS compensated by having a “household manager.” That’s a huge benefit that’s enjoyed only by this kind of family.

        Single parent families and families with two employed parents have to do all this same work but fit it around their jobs. Typically they have daycare and other out-of-pocket costs, in addition to the drain on their time and quality of life. If the Conservatives want to pick one family configuration to sponsor, they naturally made the worst possible choice.

        Incidentally, my family would see a huge advantage from income splitting, this isn’t sour grapes on my part.

  3. As per previous commentor’s points 2 and 3, Milligan’s arguments seem backward and to prove the opposite of what he is saying. Exactly what we expect from a politician and not a professor. The disclosure statement explains it all. A Liberal supporter commenting on a Conservative policy initiative.
    Valuing a stay at home worker would warrant taxing the single earner family as a 2 earner household and not punishing it. Enticing 2 earner families to become one earner families ( keeping in mind the benefits of income splitting are geared toward high earners) frees up jobs for those who may really need them (lower income earners). Anybody can see this, Professor?

  4. What seems to be missing from the anaylsis is that the income splitting is NOT the governemnt giving money away….it is the Government NOT TAKING money away from those who have earned it. Those opposed to income splitting are basically in favour of wealth confiscation by Government…a tax by any other name. Income splitting is just another tax cut, but at least it will be fairly done. You’ve earned it…you deserve it.

    If you didn’t earn it…….stop trying to steal from those who did.

    same applies to TFSA’s. People don’t think they should be increased, but there is never any mention of the fact that the money invested in TFSA’s has ALREADY BEEN TAXED.

    Keep your greedy socialist paws off my bank account.

    You want money….get off yer ass and earn it like the rest of us.

    • OK James – To put it in your terms: So they are NOT TAKING money from those who can afford it, but are CONTINUING TO TAKE money from those less well off. And you think this is equitable?

      Re the TFSAs: the money put in was taxed; the growth on that money has not been. And who, I wonder, has the most opportunity to invest their spare cash and watch it grow? The people working several part-time McJobs to try to keep their families fed? Or the upper middle class to wealthy folks?

      Let’s face it: you don’t really care about how these changes impact others, as long as it results in more money in YOUR pocket. Guess a little self-interest goes a long way toward buying your vote, eh?

  5. This “critique” is the best that an Justin Trudeau economic consultant can come up with? The media and faculty don’t even both disclosing their potential conflicts-of-interest anymore. Like Jonathan Kay not disclosing he was editing Trudeau’s biography while continuing to edit the National Post.

    1) There is no confusion in work incentives. The working income tax benefit and the UCC provide an incentive for those who want to work, and the family tax credit eliminates the unfairness in the tax code to the work/home choices of family units. i.e. Both provide families with more choice.

    2) Complexity. Most people use software to do their tax returns that take you through pretty much any process relatively painlessly.

  6. Well, let have a living example: Husband and wife came as emigrant to Canada with a 7 years old child. Husband got a job 70K, wife cannot due to language and skills. For 1 year she attended a free gov sponsored English school. Then she gave birth of a child. No paid martenity leave. She drop the school to raise the child. It does not make any (money) sense to send the child to a daycare and to start a job, as low paid job 10$/hr is much less than the daycare cost. So, when a child reached 6 and started school, mom went back to the (old) language school. Oh, no, she is a Canadian Citizen now and cannot get the same school for free. 1.5 more years at a lang school for a fee till she found a job. She makes 20K and the husband 95K.
    Mr. Milligan, did you study this use case? How much money this family would have saved if income split would have been applied since day one?
    Income split will cover a gap between individual income base taxing and family income base benefit from taxes.
    Let we make it simple: tax the husband individually for 70K and financially support the wife as a no income individual OR split the income 35/35K and do not suport the wife due to high family income. Till today it is tax the husband for 70K as individual and do not give any financial support to the wife (for this use case in 8.5 years) because she has high family income.
    This gap, who knows, after 100 years will be consider human rights violation and the Prime Minister of that time will give an apology to Canadian families affected and a symbolic amount of money will be given to survivers.

    • More: based on the example above: husband 95, wife 20K. They are taxed individually. However, Child Tax Benefit is $0, HST tax benefit is $0, Appartment Rent tax benefit $0, etc. for them due to high family income (?!). Well, tax me as a family then!
      Opposite parties: family income splitting helps emigrants in their most difficult years and probably thereafter. Do not take examples of high end where you belong. Do not take examples as 100K/0.

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