Income-splitting: An expensive way to solve a small problem, and to make a bigger problem worse

The Conservatives are floating the idea of income-splitting, and Andrew Coyne - who has apparently read Jean-Yves Duclos' Innis Lecture that I referred to here - approves on the basis of fairness:

For once, the crass appeal to the base is also the perfect means of broadening the base; the cynical vote-buying thing is also the right thing. A lot of arguments are going to be made about this, so let’s get one point straight off the top. This isn’t about bribing mothers to stay home, nor is it one of those social-engineering Tory tax credits aimed at rewarding one type of behaviour or another. The fundamental case for income-splitting is one of fairness.

Fairness does not just mean sharing the tax burden equitably between rich and poor: what economists call “vertical equity.” There’s another kind of fairness, that also has to be taken into account. If it’s important to treat people in different circumstances differently -- ie the rich pay more tax than the poor -- it’s no less important to treat people in similar circumstances the same: what’s called “horizontal equity.” And, when it comes to couples, the tax law doesn’t.

A valid point. But if you had $5b of public money to allocate, this particular example of inequity comes very, very low on my own personal list of priorities. I can see the logic for income-splitting, but why not make the change revenue-neutral by increasing income tax rates at the same time? (Alright, we  already know the answer to that one.)

Besides, horizontal equity isn't the only consideration. Since the gains would largely go to those at the upper ends of the income distribution, vertical equity should be taken into account as well. Andrew Coyne's solution would be to have a flat income tax - but we already have a flat tax. Income splitting would only accelerate the trend towards more income inequality.

In case the Conservatives have really run out of ideas for spending that money, here are a few:

• Beefing up transfer programs such as the  GST rebate and/or the Child Tax Credit
• An Earned Income Tax Credit
• Make it easier for students from low-income households to pursue post-secondary education (no, this does not mean reducing tuition fees).

And if they really, really feel that they have to cut taxes, they should be cutting corporate taxes, which are high by international standards. The payoff here would be increased investment and productivity. Canada's low rate of productivity growth is a chronic problem, and is much more important than the one that income-splitting would solve.

Comments

[RIchard Senechal]

We are a single income family and we believe that our children should be raised by one of us is it really fair that our tax burden is more than two income families? Let us bring back traditional values. Do you know where your children are?

Richard