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Income-splitting isn’t about the rich and the rest

Middle-class benefits make it a different debate


 
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)

It’s not just the eyebrow-raising $2.2 billion that Stephen Harper’s “Family Tax Cut” will subtract from federal revenues every year that makes this income-splitting scheme the most controversial tax change since his government shaved a couple of points off the GST.

The very notion of income-splitting takes us out into bitterly contested ideological territory. Critics suspect, with good reason, that letting couples with kids divvy up their incomes for tax purposes is meant—even if Harper doesn’t put it this way—largely as a boon to families with a stay-at-home mom.

More often heard, though, is criticism of the Family Tax Cut from the income-inequality angle. The NDP’s website, for instance, slams it as a “giveaway to the wealthiest,” while Justin Trudeau has railed against it for handing “a tax break to Canada’s wealthiest families.”

From the time Harper announced the plan last fall, I’ve wondered exactly how much of that $2.2 billion will go to well-off households. Typically for this secretive government, Finance Minister Joe Oliver refused to tell me. His department obstinately declined to offer a simple breakdown by family income of where they expect the benefits to flow.

I finally got a projection last week from the helpful experts who work for the independent parliamentary budget officer. Combining numbers the PBO provided with some from Finance, Maclean’s has created the table you’ll see below, which I think is instructive—and a little surprising. It confirms that the policy is no good to most families at lower income levels, but a nice boost for most in the middle, and not so great as you might have been led to believe for those at the top.

The assumption that this policy’s spoils would skew wildly to the rich goes back to some early, excellent, influential analysis of income-splitting, notably the C.D. Howe Institute’s 2011 report by Alexandre Laurin and Rhys Kesselman. They forecast that 40 per cent of total benefits would go to couples with combined incomes above $125,000, with some well-off families lopping $6,400 from their tax bill.

But that study, and others like it, changed matters. Even the late Jim Flaherty, in perhaps his last important intervention as finance minister, basically said income-splitting, as promised by the Tories in the 2011 election campaign, wasn’t fair. Harper adjusted. By the time he announced the final policy last fall—allowing couples to transfer up to $50,000 of income from the higher-earning to the lower-earning spouse—the total benefit per family was capped at $2,000.

That dramatically reduced the share of tax savings funnelled to the top tier, which leaves the middle winning bigger. According to the PBO, more than 80 per cent of families with kids making $60,000 to $120,000 will gain something, saving on average about $1,200. That middle swath makes up only about a third of all families with children under 18, yet stands to collect more than half of the total benefits of income-splitting.

This is not convenient for critics of income-splitting, not one bit. It messes up the neat symmetry of their case—that it rewards the rich while slighting the poor. To oppose income-splitting while acknowledging that Harper’s version favours the middle class would be far trickier. The middle class votes.

Still, I like the way I’m forced to reconsider my own perspective. A gift to the rich that ignores the poor? I didn’t have to think hard to oppose that. But a benefit that goes disproportionately to the middle? I still can’t support it, since it continues to offer too little to those struggling hardest to get by, but I had to ponder more carefully.

Who isn’t for middle-class families? Platform jockeying in the run-up to this fall’s federal election is, as usual, shaping up as being mainly about championing them. All parties try to position themselves that way. But wouldn’t it be better, no matter which way you’re inclined to vote, to shift your focus further down the income scale?

If you’re a Conservative, and you believe in opportunity, then recognize that the least well-off—not those in the middle—most need better chances. If you’re a Liberal and you believe in balanced policy, acknowledge that society’s worst imbalances aren’t felt when you reach the middle, but while you’re stranded near the bottom. If you’re a New Democrat and you believe in government’s ability to help in areas like daycare, then look first, not at a middle class that’s muddling through, but at those who really aren’t.

The income-splitting issue hasn’t so far guilted anybody into budging off the multi-partisan middle-class fixation. Why would it have? A tax break summed up routinely by its critics as a gift to the rich, designed along social-conservative lines, doesn’t invite much genuine reflection.

But the actual effects of the policy appear to be far less stark than was imagined. Like all serious discussions about how we tax and spend, the closer we look, the less any easy rhetoric seems to fit the facts. The income-splitting debate can be reasonably framed many ways, but it isn’t just about the rich and the rest.

Who benefits (and how much) from Harper’s income splitting


Family income Families with kids Families who benefit Percentage who benefit (%) Total benefits (000's) Percentage of total benefits (%) Average benefits per family
<$60K 1,702,385 376,000 22 $370,000 17 $970
$60K-$120K 1,234,400 1,011,000 83 $1,153,000 52 $1,219
$120K+ 1,133,225 594,000 54 $714,000 32 $1,190

(Sources: Finance Canada, Parliamentary Budget Office)

 

Income-splitting isn’t about the rich and the rest

  1. The truth is no one cares about the poor. We talk about it, and some people donate some money to certain causes, but that is about it. Middle class families should also look at this and recognize it is unfair and improper for them to take this money when so many poor families could use it more. But they won’t.

  2. This tax cut does nothing for families who really need it and nothing for all the canadians who don’t have kids or large income disparities. There have to be better ways of helping out the poor in our rich country. Doesn’t help matters that harper is giving a chunk of cash right before the election in addition to the tax break. blatant vote buying I hope that people can see through it and boot him out before our country is completely unrecognizable

    • Take the tax rebate, and give every dime of it to a charity of your choosing. Volunteer and help poor kids. Stop expecting the government to do everything.

  3. I can’t believe the spin around this. It was never meant to provide a benefit to everyone, but to correct an inequity in our tax system. A family with a single income equal to that of a family with two incomes will pay higher income taxes. This action was meant to correct that, not to provide an equal benefit to both families, which would simply maintain the inequity.

    • Exactly. But the anti-CPC media needs to find ways to spin this as a travesty. This income splitting plan is plainly about making the system fair. If the Liberals and NDP are grumpy about the loss of revenue, they’re free to campaign on raising taxes. But to try to keep revenues up by supporting a practice that is clearly unfair just shows how they have no morals.

  4. Why, when I have dedicated 18 years (to date) to my career as a stay at home parent am I not entitled to income-sharing? Do I not earn my income? Further, why is it acceptable to take HALF our family income in taxes and still not allow us this small tax break? The remuneration my spouse has striven for so long to receive is commensurate with his level of education, chosen profession, degree of client satisfaction, and, quite frankly, dedication and hard work. It seems that we are being punished for our personal choice regarding our family and the degree of professional or financial success that we have achieved.

    • Talk to your tax preparer, I do not think you understand.

  5. Poor people spend all that they get. they spend money is known ways on very basic goods. Removing the same amount of money from each tax bill would have distributed the impact of the cut throughout the range of goods and services available in the economy, from food and lodging , for the poor, to travel and consumer goods for the middle class, and thence to toys and financial investments for the rich. Tilting the cut in this way reduces the impact on immediate expenditure in favour of floating the price of investments. It favours expensive toys over the food basket. It enables people with credit to extent their spending at the expense of people without credit who meet their basic needs with spare cash. A better plan would have specified a minimum tax benefit as well as a cap, to sweep in more of the lower classes. It would have allowed splitting three ways, rather than two, with the children collectively being the third leg of the equation. There is really no need to shelter a childless couple from the current tax structure.

  6. Well it is just awful that some get more than others ! Sounds like sex, where the good looking guys do better. There has to be a law to force the great looking women to accomodate the geeky guys.
    I fear this writer has no concept of living within his means or of budgeting

  7. Any net benefit of income splitting to almost any tax payer has now been so diluted that I can’t believe that setting it up and administering can be anything but a net cost to the economy. The only reason that it is staying alive is that Harper wants to be able to say that he delivered on his promise, but at best that is now a Pyrrhic victory.

  8. What I love about Canada is that the opportunity to become successful is available to everyone. My wife and I have high school diplomas, married after high school and had three kids in our 20’s. People told us we were crazy but we just didn’t care. If things weren’t going well we would find a better job and / or move to a different place. My wife quit working after our second child was born and started working again after the third started school. We now, according to this article, qualify as the ” rich ” in our 40’s. We know a lot of immigrant families that have come to Canada and have worked hard and looked for opportunities to get ahead and have had success. Because of the ( middle class and rich ) success we have bought homes, invested in stock’s, RRSP’s, TFSA’s, we pay for our kids sports and clubs, travel more, eat out more and generally support the economy more, all the while paying more in taxes. We are penalized for succeeding when the real equality for Canadians is that the opportunity is available to everyone. What you do with it is up to you but please don’t blame me if you decide to do nothing.

  9. Irregardless of tax bracket, the problem with the above analysis is that the Family Tax Cut isn’t calculated based on family income. My husband and I both earn the same amount of income so we get nothing from this tax credit even though we have two children. If only one of us worked and earned what we both make combined, we would save around $2000 in taxes. In addition, if one of us were a stay at home parent, the other spouse could claim the equivalent to spouse, which equates to around another $1,700 from the federal government plus the provincial credit. To be fair, the family tax cut should be based on family income, with higher income earners receiving progressively less. I am totally guessing here, but I imagine the number of households with two income earners is higher once you reach the $120K mark, therefore resulting in fewer benefits being paid to those families.

    • If you and your husband earn identical incomes, then you’re already benefiting from “income splitting”. The whole purpose of income splitting is to partially correct for a very gross inequality in the tax system, where couples with highly differential incomes always pay more income tax, often thousands more, than couples earning the identical amount, but evenly split. You don’t benefit from this income splitting proposal precisely because you’re already benefiting from the happy circumstance of earning identical or near-identical amounts. Not every family’s income is distributed as efficiently as yours is. So congratulations – you’ve been income splitting all along and didn’t even realize it.

      • Someone who is still using the word”irregardless” probably doesn’t realize a lot of things.

  10. Cut 2 years of OAS because it’s supposed to get expensive (it gets cut after the boomers retire). How many people believe it? The whitewash in G&M the other day was nice but whoever wrote it didn’t know how to do simple maths. Bottom line, there won’t be enough jobs contributing to the kitty in the future.

    How are we to pay for split income (seniors and people with kids) in the future years? Con and G&M maths?

  11. I still have not had anyone be able to explain to me why they think it is fair that a couple with one $100,000/year job and one stay-at-home should pay more income tax than another couple each making $50,000/year.

    • Because the family with one $100k/yr income has another adult free to provide childcare, home maintenance, education enrichment, shopping, cooking, cleaning and any number of other untaxable services of value to the family (not to mention the potential reduced cost of one commute and one work wardrobe).

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