Editorial: Just back away from income splitting

The importance of this week’s federal budget lies not in what new promises the Harper government offered; as expected, the budget was a low-key affair. Rather, the real interest stems from what old promises the Tories now appear ready to reconsider, if not abandon altogether.

In the lead-up to Tuesday’s budget, Finance Minister Jim Flaherty was asked about the status of one of the Conservatives’ keystone promises from the 2011 election: to implement income splitting for families with children once the budget deficit disappeared. With a balanced budget now scheduled for next year, however, Flaherty appears to have developed cold feet. Asked for an update by Global Television, he said, “I think, in the next year, it will be healthy for Canada to have a fulsome debate about that issue. There are some people who benefit and lots of people who don’t, in that world of income splitting.” Pressed to confirm whether the policy is still on the table, Flaherty’s body language and response evinced an obvious desire to distance himself from any final decision: “That will be up to the Prime Minister, at the end of the day, whether he chooses to go ahead with it or not.”

Considering Prime Minister Stephen Harper once called income splitting “one of our highest priorities,” such a lack of pre-budget enthusiasm from his longest-serving cabinet minister seems a point worth noting. Plus, the 2014 budget itself contains no mention of the three-year-old promise, despite the fact that a balanced budget is now clearly in sight. There’s good reason for reluctance on this issue.

It is certainly a worthwhile goal to ensure Canada’s tax system treats families equally. And it’s a demonstrable fact that our progressive tax structure requires single-earner families to pay more taxes than dual-earner families with identical combined incomes. The Tories’ 2011 election promise was that families with children up to the age of 18 would be able to shift up to $50,000 in income to a lower-earning spouse, dramatically cutting total family taxes owing in cases where there’s one dominant breadwinner. It also goes without saying that income splitting is politically advantageous, targeting as it does mostly middle- or upper-class families with stay-at-home spouses: prime Tory vote territory.

However, Harper’s version of income splitting will add yet another layer of complication and mystery to an already Byzantine tax system. And at great cost. As currently proposed, taxpayers would cycle in and out of income splitting during the normal course of their lives: Young married couples would file individually. When kids arrive, they’d be able to split their income. After the kids left, they’d go back to filing separately. Finally, upon retirement, they’d be splitting once more, thanks to the Harper government’s previous innovation of pension splitting for seniors.

Such a back-and-forth process creates all sorts of unusual and undesirable incentive effects with respect to work and child-rearing. (Future tax tip: Maximize your income-splitting potential by having your kids as far apart as possible.)

“Income splitting is just one more way to increase the complexity of the tax system,” observes economist Tammy Schirle at Wilfrid Laurier University in Waterloo, Ont. “It will result in even less transparency and a lot more confusion.” She notes, as well, that the total cost could be as much as double the original $2.5-billion-per-year estimate, given spillover effects on provincial treasuries. What is also true, as Flaherty suggested to Global, is that the bulk of these benefits will flow to a relatively small number of wealthy, single-income families.

Of course, confusion, opaqueness and narrowly defined benefits have long been hallmarks of Tory tax policy. The maze of dubious boutique tax credits for such things as public transit, children’s sporting activities and art lessons is another example of how the Harper government has made tax time ever-more difficult and obtuse. In many cases, families most in need are the ones least likely to receive these tax breaks. According to recent research by former Statistics Canada head Munir Sheikh, adding up Ottawa’s spending on these sorts of tax expenditures increases the size of government by seven per cent of GDP, a massive sum that, for the most part, lacks regular legislative oversight or public scrutiny.

As much as all politicians seek to favour middle-class families and to laud the benefits of marriage, there are better ways to lend a hand at tax time than income splitting. If Harper really wants to help stressed-out Canadian families, he should make the entire tax system easier to understand, less politicized and more efficient in delivering benefits to folks who really need them. Spending less time doing taxes is a gift every parent can appreciate.