Economic analysis

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.)