Matt Krzepkowski and Jack Mintz have recently produced a working paper titled "No More Second-Class Taxpayers: How Income Splitting Can Bring Fairness to Canada's Single-Income Families." The paper argues that higher income single-earner married couples are "disadvantaged by the current system." It proposes to put an end to that by allowing income splitting, so a one earner couple with income of $200,000 a year would pay about the same taxes as a two-earner couple where each person earned $100,000 per year.
The Krzepkowski and Mintz paper is the latest salvo in a long war over the best tax treatment of the family. Alexandre Laurin and Rhys Kesselman produced an analysis of income splitting for the CD Howe Institute in 2011, and back in 2000, Carole Vincent and I wrote a paper on Taxing Canadian Families for IRPP (downloadable here: Vincent_Woolley).
While cleaning out the the bottom drawer of my filing cabinet I came across a number of other, older studies of the taxation of families in Canada. As most are in the public domain, but difficult or impossible to obtain elsewhere, I thought I'd post them here. What is remarkable about them is the degree to which they presage the current policy debates - most of the ideas in the Krzepkowski and Mintz paper were brought forward and discussed in the 1960s and 70s. Understanding why they were rejected then may help clarify the current policy debate.
In 1966, the Carter Report recommended that Canada adopt "joint taxation". Married couples would file a single joint return, and be treated as a single tax unit. According to Carter, Canada's individually-based tax system - the system we still have today - leads to "ludicrous results". Their example: in 1965, a family where each spouse had an income of $4,000 per year paid $200 less in taxes than a family where one spouse had an income of $8,000 per year, and the other earned nothing. "We can see no justification whatsoever for this difference," they wrote, "particularly if all the income is from property and neither spouse is employed."
Joint taxation can be beneficial or disadvantageous for married couples, depending upon the rate at which the joint income is taxed. The rates suggested by the Carter Commission would have allowed married couples, in effect, to split their incomes, producing considerable tax savings for higher income single-earner couples, while causing taxes to increase for couples in which the spouses had equal earnings. Crucially, the Carter Commission would lower single-earner married couples' taxes to US, or lower than US, levels:
I suspect the Carter Commission would have found Canadian tax treatment of married couples a lot less "ludicrous" if it had been in line with the tax treatment of families in the US. But it wasn't, and still isn't. The US acts as a benchmark; a reference point for Canadian tax policy. The existence of joint taxation and income splitting there means that pressure to adopt such policies here will never go away.
2. Douglas Hartle (1971) "Taxation and Married Women in Canada" Report Prepared for the Royal Commission on the Status of Women. Ottawa: Information Canada. Download Hartle background paper here; access Royal Commission on the Status of Women (Bird Commission) here.
Doug Hartle was the Research Director for the Carter Commission, so it is not surprising that the Royal Commission on the Status of Women turned to him when they needed a background report on the tax treatment of married women in Canada.
What really struck me, re-reading Hartle's report, is the remarkable similarities between the approach he advocated, and the Krzepkowski-Mintz proposal. Both advocate some kind of joint taxation/income splitting. Both suggest taxing what Hartle called the "imputed income" of housewives, or what Krezpkowski and Mintz call "implicit income." Both advocate limiting the transferability of the basic personal exemption, in order to mitigate some of the negative impacts of joint taxation on married women's incentives to participate in the labour force.
Today, many feminists oppose joint taxation on the grounds that, when spouses' incomes are aggregated, the secondary earner - usually the woman - effectively faces the primary earner's marginal tax rate, which discourages female labour force participation. Given this, I find it somewhat surprising that the Bird Commission accepted the Hartle/Carter joint taxation recommendation (p. 304 of the report). But perhaps it isn't so strange - Canada's tax policy community is fairly small and tight knit. Today there are people like Elisabeth Gugl, Lisa Philipps or Kim Brooks who can provide an alternative view on taxation. The Bird Commission would have had no comparable experts to call on. Yet even at the time, commissioner Elsie Gregory MacGill strongly disagreed with the joint taxation proposal. Later on, chairman Florence Bird retracted her support for joint taxation.
Supporters of the Krzepkowski and Mintz idea of taxing implicit income might be interested to learn that the Bird Commission rejected Hartle's suggestion of taxing imputed income, "Although the concept of imputed income is theoretically sound, we feel that its implementation would pose great difficulties." Reading between the lines, I suspect that the (then) Department of Revenue said it was a no go - alternatively, it might have been that Hartle's proposal was simply not understood.
The Bird Commission made a number of recommendations with regard to taxation policy, including reducing the spousal amount exemption, and converting deductions, including the child care expense deduction, to refundable credits. In the end, however, those were largely ignored.
3. Louise Dulude (1976) "Background study on women and the personal income tax system" Ottawa: Canadian Advisory Council on the Status of Women Download here
For a popular summary of Dulude's argument see: "The Person Papers: Taxation Untangled" Canadian Advisory Council on the Status of Women, 1976 (Download CACSW_taxation_untangled). For the Advisory Council on the Status of Women's Recommendations (based on Dulude's Report) see here (Download CACSW_1978)
Louise Dulude's background study is one of the first feminist analyses of taxation in Canada. Dulude was a lawyer and social activist, and she brings this perspective to her research.
Dulude's paper made a number of recommendations which have subsequently been adopted: that husbands and wives should be allowed to employ each other in unincorporated businesses or farms, or to enter partnership arrangements; that the (then) child exemption should be replaced by a refundable child benefit; that money received as child support should not included in the recipient's taxable income.
What I find particularly interesting about Dulude's work, though, is her focus on property rights, ownership, and control. Joint taxation or income splitting proposals, such as the Krzepkowski-Mintz one, tax married couples as if all income and assets were shared jointly by the spouses. Yet they do not require any actual sharing of income, or change marital property regimes. As Dulude puts it: "These systems do not encourage legislative changes towards more sharing by the spouses, they assume that spouses already share everything" (p. 31). She was talking about the Carter/Hartle joint taxation proposal, but the point is still relevant today.
Dulude is also critical of the idea of taxing imputed or implicit income.
Hartle states and repeats that spouses save money because of the wife's provision of housekeeping services. In fact, it is the husband who saves, not the housewife who more than likely owns nothing. To require the housewife, who has only a right to basic support, to pay tax on an arbitrarily-determined imputed income, would be adding insult to injury.
This, I think, rests on a misunderstanding of the Hartle proposal. Under Hartle's proposal, as under Krzepkowski and Mintz's, the person generating implicit/imputed income does not pay any taxes. Under Hartle's proposal, each person who is not in paid employment is assumed to have imputed income of $2,000. He or she is also assumed to have basic needs of $2,000, hence receives a $2,000 exemption. So a person with no employment income has $2,000 of imputed income and a $2,000 exemption - hence pays no tax.
Hartle then makes the crucial assumption that earnings reduce imputed income dollar for dollar. A person with employment income of $1000 has $1000 in earnings, $1000 in imputed income, and a $2,000 exemption - so pays no tax. Only when a person has employment income of more than $2,000, and no imputed income, will he or she pay start having positive tax liabilities. For both Hartle and Krzepkowski-Mintz, the whole imputed/implicit income is dealt with by eliminating the married amount tax credit, and replacing it with an individual earnings exemption.
Overall, however, Dulude's paper is well worth reading for the insights it gives into the tax treatment of Canadian families.
4. Maureen Maloney (1987) Women and Income Tax Reform. Ottawa: Canadian Advisory Council on the Status of Women. (Download Maloney_women_income_tax) and CACSW Brief on Tax Reform Download Brief_on_tax_reform
Maloney's paper reiterates a number of positions taken in earlier CACSW papers - the need for changes in the tax treatment of child support, the need to reform the child care expense deduction to make it more generally available, and more attractive to low income earners. She also takes a strong position against the goods and services tax, arguing that it is regressive, and income taxes are a more progressive way of raising revenue.
One thing that is interesting about Maloney's paper is that it conveys a sense of how tenuous Canada's individually-based tax system is. She points out how jointness has gradually crept into the income tax system, through transferable deductions and credits, and provisions such as the spousal amount tax credit (then the married exemption), and is critical of this trend. She recommends that, "At the very least, individual taxation should be reaffirmed as the appropriate unit of taxation."
Twenty-five years later, the prospect of such a reaffirmation seems slimmer than ever.
Matt Krzepkowski responds in the comments below on July 1st.