The Conservative Party of Canada has announced that, if elected, they would allow families to "share up to $50,000 of their household income for federal tax purposes." (This tax change would be implemented in about four years time.)
In tax lingo, this means income splitting. A family where one person has an income of $110,000 and the other person has no income could opt to be taxed as if one person had an income of $60,000 and the other person had an income of $50,000.
Because Canada has a progressive income tax system, shifting income to the lower earning partner can result in considerable tax savings. I estimated the savings for a one-earner family with $110,000 in taxable income at $3,989 at 2010 tax rates, but that did not take into account any changes in provincial tax liabilities.
Note that there is no requirement that the income actually be shared, for example, deposited in a joint bank account. The sharing is for tax purposes only.
The proposal is motivated by a desire to make the tax system "fairer for families" - suggesting, implicitly, that the current tax treatment of families is unfair.
The tax unfairnessness argument goes as follows: Two families with a total income of $110,000 should pay the same tax, no matter who earns that income. With our current tax system, a one-earner family pays with a $110,00/$0 income split pays more tax than a two-earner family with a $60,000/$50,000 income split. Some say that's not fair.
Yesterday, in my Globe and Mail blog I wrote about some problems with this argument, which prompted the following response from a reader: "...for the past 40 years, the 30% of families who chose to have one spouse leave the workforce to raise their children have watched their dual-earner counterparts...travel to Florida every year, be able to afford 2 cars, become mortgage-free by age 45..."
Which made me think: is the issue here tax unfairness, or income unfairness?
The Canadian marriage market is characterized by positive assortative mating, which is a fancy way of saying that people marry people like themselves. In the 1960s, that meant that a medical student would marry a woman with a social and economic background that was similar to his, and then generally Mom would stay home and look after the kids. Fifty years later, some people still have 1960s style marriages - and some people don't. The difference in disposable income between a doctor with a stay-at-home spouse and a doctor married to another doctor is - well - sizable.
A number of papers have examined the contribution of assortative mating to "income unfairness" or income inequality.
A 2003 paper by Nicole Fortin and Tammy Schirle, examining changes in the Canadian labour market up until that time, reached the following conclusion:
We thus find that the implications of women’s economic progress for the welfare of families have been uneven over the past two decades. Women and their families in the upper deciles of the family earnings distribution have been enjoying rising incomes, while families in the middle of the family earnings distribution have seen their family earnings eroded by the stagnation of men’s earnings in the 1990s. There has been relatively little change for those families at the bottom of the family earnings distribution.
In other words, at the top end of the income distribution, families with two professional incomes have seen rising earnings, while one-income families in the middle of the income distribution - people like my disgruntled correspondent - have seen stagnant earnings.
What is interesting is that the "fairness for families" tax initiative helps precisely those one-earner families in the middle of the earnings distribution - the family where one spouse has income of $110,000 and the other spouse has no income. Income splitting has zero benefits for single-parent families, or for families where the highest-earning spouse earns less than $40,000 a year - those families at the bottom of the income distribution whose situation, according to Fortin and Schirle, hasn't changed.
The tax system is being used to undo the changes in the income distibution created by greater female labour force participation.
I'm sure lots of people will think this is a great idea - and lots of people will disagree. That's why I predicted in the Globe and Mail piece that tax fairness for families could lead to a Mommy War.