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.
As a follow-up: The 2003 paper has been published in the 2006 book Dimensions of Inequality in Canada (edited by David A. Green and Jonathan R. Kesselman, UBC Press).
The Mommy War would not be new to me - every month I look at my Universal Child Care Benefit cheque and think of the at-home moms who get more help with child care than I do. (Of course that's treating the UCCB as though it has something to do with child care, which is perhaps a different issue.)
Posted by: Tammy Schirle | March 29, 2011 at 05:30 PM
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
Is that really the middle of the distribution for families? Strikes me as well north of the median.
Posted by: Stephen Gordon | March 29, 2011 at 06:15 PM
My problem with this is that no consideration is taken of the reality that, before taxes, a couple with one earner making 100k is better off than a couple with two earners making 50k each. In the second case a good bit of their time is taken up, they probably need to pay for childcare if they have children, and the other couple gets the use of the non-working spouse's time for home production, including childcare. There should be a difference in tax treatment. Whether the current system favors the two earner family more than it should is one question, but I see no argument for treating them the same.
Posted by: Jim Sentance | March 29, 2011 at 06:33 PM
Steve: "Strikes me as well north of the median."
Steve, north, but not well north. Average income of two parent family with children in 2008, according to Statistics Canada publication Women in Canada was $100,200. Married couples with adult children have a higher income.
Jim, you're on my side of the Mommy War.
Posted by: Frances Woolley | March 29, 2011 at 06:57 PM
While I tend to think that it is more equitable a single 100k earner with a stay-at-home spouse pays more than a dual-income, 50k-each couple does, here's where there's an unavoidable inequity in the current system:
Right now, two 50k earners also pay less than a couple where one earns 75k and the other earns 25k. This couple doesn't enjoy the advantages of having a full-time, stay-at-home parent to handle child care and all of the other (paid in-kind and untaxed) household work that Frances cites in her Globe post. Admittedly, the size of this difference isn't as big as that between the 50k/50k and 100k/0k cases. I wonder if there would be a way to even things up between the 75k/25k and 50k/50k couples without also evening those couples up with the 100k/0k couple.
Posted by: Darren Thomson | March 29, 2011 at 07:00 PM
Frances: I was curious enough to check Cansim (didn't think to look at what might be public); here are the Table 202-0410 numbers for the total incomes of two-parent families with children in 2008:
One earner: Average = $71,700; Median = $51,900
Two earners: Average = $102,400l Median = $86,400
And the past data show those sharply different trends you mentioned: one-earner families' real incomes are falling over time, while those of two-earner families have been rising.
Posted by: Stephen Gordon | March 29, 2011 at 07:19 PM
Can't help but think that the argument over income-splitting is one reason to advocate a linear tax system, where it would be irrelevant. GAI plus flat tax. It's still progressive in the average tax rate, of course.
Posted by: Nick Rowe | March 29, 2011 at 07:48 PM
"My problem with this is that no consideration is taken of the reality that, before taxes, a couple with one earner making 100k is better off than a couple with two earners making 50k each."
Agreed. The only way you can see them as equivalent is if you value home production at zero. I don't see how that valuation is realistic. (As I mentioned today on Economy Lab)
Posted by: Mike Moffatt | March 29, 2011 at 07:56 PM
Mr. Harper's proposal turned me off. It downright made me angry. It's a slap in the face to bachelors everywhere.
I'm a bachelor. My brother is married. He enjoys the security and flexibility of two incomes; he and my sister-in-law have moved cities and facilitated a job change for my brother by having one spouse out of work while the other is employed, with both employed they enjoy the benefits of maintaining a household on two incomes. It has greatly helped their security and prosperity.
On the other hand I have to maintain a household on a single income, when out of work my household does without. Many household costs, like rent, utilities and routine household expenses don't scale with household size. The more income you have in your house, the less a proportion they take up.
As a bachelor I have to maintain my living with the insecurity of one income. I don't get to split my income with anybody.
I am against any sort of "marriage break" in our income tax system. Income tax should be indifferent to the fact that you are married or not. Income is income and you should pay the same whether you are married or not.
Mr. Harper just lost my vote.
Posted by: Determinant | March 29, 2011 at 08:02 PM
Darren: "Right now, two 50k earners also pay less than a couple where one earns 75k and the other earns 25k. This couple doesn't enjoy the advantages of having a full-time, stay-at-home parent to handle child care and all of the other (paid in-kind and untaxed) household work that Frances cites in her Globe post."
It would almost never be worthwhile for a person to pay for full-time child care in order to earn $25K in the labour market - it would be far more profitable to open up a home day care. A family with a $75K/$25K income split probably has one spouse working part-time and has some arrangement that means that they don't need much child care.
Steve, thanks for those numbers. What this means is that the median one-earner family stands to gain ( 0.22-0.15)*(51,900-40,970) or about $770 from the income sharing. Despite what I've said, a two earner family that finds themselves in different tax brackets easily experience comparable levels of savings.
Nick - the reaction from the other side of the room: that's what the Conservatives would like to see.
Posted by: Frances Woolley | March 29, 2011 at 08:10 PM
I don't think this is a "marriage" break, but a "child" break. Myself and my wife decided not to have children. So we are not a family according to Harper. Glad he clarified that.
I think bottom line is that people have to be somewhat accountable for their choices. Should the next one be that people in Weyburn Saskatchewan pay more income tax than people in Vancouver because the cost of housing is cheaper there?
Posted by: Chris B | March 29, 2011 at 09:18 PM
Jim Sentence: "before taxes, a couple with one earner making 100k is better off than a couple with two earners making 50k each."
Especially in Ontario where the Health Premium penalises two income families over one earner with the same total taxable.
Posted by: Mark_dowling | March 29, 2011 at 09:25 PM
I'm with Determinant on this one (except Harper never had a chance at my vote in the first place).
As I explained a while back I see no justification why the tax system should try to treat *families* fairly rather than treating *individuals* fairly. After all, we are all individuals but only some of us are in families. Our politics works on one person, one vote, not one family one vote, etc.
I refer to the proposed policy as the 'marriage welfare program.' Presumably right-wing types (since they are always consistent) will refer to it as 'social engineering'.
Posted by: Declan | March 29, 2011 at 09:29 PM
I'm stuck by the absence of the kids themselves as subjects in the analysis. Do we consider them just discretionary consumption?
Posted by: Michael | March 29, 2011 at 10:50 PM
Michael: "I'm stuck by the absence of the kids themselves as subjects in the analysis."
Good point. I don't think the "kids as yachts" perspective is as common as it was in the 1990s when the thinking was "why should families who choose to have children get a tax break any more than families who choose to have yachts get tax breaks?"
France has a system that allows income splitting between parents and children - this is sometimes credited with France's relatively high birth rate. That's never been on the Canadian policy agenda.
Shelley Phipps has done some interesting work that suggests there is a link between universal payments for children and child well-being. I'm of that view: if you want to support families with children, support families with children.
Posted by: Frances Woolley | March 29, 2011 at 11:05 PM
Frances: i'm not aware of significant support for GAI among conservatives. It's not patronizing to poor people. And flat tax *plus GAI* doesn't have to be more or less regressive than the current system. It depends on the level of the tax and the level of the GAI. I'm with Nick. And with Determinant and Michael and Frances: It's about kids, not marriage. So pay a partial GAI to parents on behalf of their kids.
Posted by: K | March 30, 2011 at 12:08 AM
K, you mean the Baby Bonus?
This proposal smacks of the 30% Income Tax Cut that swept Mike Harris to power in Ontario in 1995. It's also designed to take a swing at the same demographic that wants Universal Day Care. Part of the problem from the Right Wing POV is those proposals have never accommodated stay at home Moms.
Both my parents worked when raising me. They were both clergy so Mom was loathe to give up her "job" (truly it is a job, but what occupation makes it a religious calling, Lays on Hands and calls down the Holy Spirit when ordaining, er, hiring you?). I went to daycare before kindergarten and as we lived in New Brunswick at the time there was no kindergarten (enrolled when we moved to Ontario). If we want to have a family-positive tax system, why can't we have one that treats families with two working parents and childcare expenses identically with one stay at home parent and one working spouse? This proposal seems half-baked at best, pandering at worst.
BTW I used to live next to a family with a Mr. Mom. The wife had benefits and a pension at her job, the husband didn't so he quit when they moved and she stayed employed.
Posted by: Determinant | March 30, 2011 at 12:54 AM
K- " i'm not aware of significant support for GAI among conservatives." - no, it's the flat tax part of Nick's suggestion that would find a ready audience. With GAI it's like so many things - it's not the principle of GAI that there would be debate about, rather the amount of the payment. Any GAI that would allow a single parent in Vancouver or Toronto to rent an apartment and buy groceries and some extras like clothing, transportation and health care would be an outrageously large sum of money from a conservative perspective.
Determinant - I'm interested in how little a typical one-earner two-parent family would gain from this proposal. I'm also wondering how many one-earner two-parent families there are out there.
The thing is: If there's income splitting for all couples, then either the federal government is looking at a massive decrease in revenue and associated spending cuts, or taxes someone else will have to increase. That's what's happened in the States, where the flip side of income splitting is that couples face a different rate scale, so two equal-earning individuals will pay more taxes if they marry.
Posted by: Frances Woolley | March 30, 2011 at 07:37 AM
At the root of the problem is the fact that CRA doesn't recognize family income as the basis for tax liability. CRA does however conveniently recognize "family" income for the purpose of determining benefit eligibility.
On the tax side, a family's tax liability is determined by the "luck of the draw" of the income split between the spouses (100/0 pays more than 75/25, 75/25 pays more than 50/50 etc.), which is ludicrous.
The result is that CRA may consider two families with $100K combined incomes to have identical need for benefit payments, yet somehow the one with a 100/0 income split has the ability to pay $8,000 more in taxes.
Anyway, this debate has been raging for 40 years with very little progress in the form of tax-friendly tax reform. However, in 2011 the Harper government is only a few percentage points (in RoC...where the election will be determined) away from a majority, and the 30% of families with an at-home spouse raising the children might just be the voting block that will give him that majority (and income-splitting or a joint tax return for Canadians).
Posted by: Pat Coghlan | March 30, 2011 at 09:41 AM
I did some quick math on GAI, and using 8000 GAI and a 36% marginal rate (flat) up to $110k. Current average tax rates are based on combined federal/provincial income tax in Ontario.
Seems like you can tune it so most people are no worse off and low-income earners are substantially better off. I'm not sure $8000/head is enough for support a single person in Vancouver or Toronto, but is a GAI supposed to allow people to live without employment income? If you're really down on your luck, you can rent a room in a rooming house for a 400, have $150 for food, and $100 for other expenses. Not luxurious, but no need to live on the street. Of course, this doesn't include any assumptions of GAI payments for children.
Earnings/Current Avg Tax/New Avg Tax
10000 0% -44%
20000 10% -4%
30000 13% 9%
40000 15% 16%
50000 18% 20%
60000 20% 23%
70000 22% 25%
80000 24% 26%
90000 26% 27%
100000 27% 28%
110000 29% 29%
Posted by: Andrew F | March 30, 2011 at 10:21 AM
Pat: I think you need to make a distinction between family-friendly tax reform and (so-called) "traditional family"-friendly tax reform. Your argument also places zero value on the work done by the at-home spouse. Why would you think it is good policy to create tax incentives that encourage middle and high income families to keep one spouse out of the labour force?
Posted by: Tammy Schirle | March 30, 2011 at 10:23 AM
Pat: A cleaning service in Calgary costs $30-40 per hour. Assuming 4 hours to clean a house, and weekly house cleaning (with kids, usually needed), that's close to your $8000 right there.
Posted by: Alice Woolley | March 30, 2011 at 10:25 AM
Andrew F - "but is a GAI supposed to allow people to live without employment income?"
Ah - there's the rub.
Lots and lots of people do live without employment income. Are they employable? What's the cost of providing the housing/clothing/internet access/phone access/transportation/literacy training/language training/mental health counselling/child care/disability supports that would be required to make them employable?
So often it's cheaper just to write people a cheque/write people off. But only if (unlike GAI) the cheque is somewhat hard to get.
GAI payments for kids create incentives for people to have children when it might not be the best thing for their long-run economic prospects.
Posted by: Frances Woolley | March 30, 2011 at 10:50 AM
Excellent post Frances. Another fly in the ointment regarding this proposal is related to where one spouse works as an employee and the other is running an incorporated business. The one running the business can exploit this tax incentive by choosing not to draw money out of the business through a salary or bonus, instead leaving it in the business. The working spouse then splits their income with their partner who no longer shows as having an income but who will benefit from the lifetime capital gains exemption when they sell or close their business. This one is a no brainer for my husband and I, though we currently do not qualify as a family (though not by any 'choice' on our part).
NOTE: if the spouse works in the business, this family has already enjoyed the ability to income split. The new tax proposal now allows families where the spouse does not work in the business to enjoy similar tax benefits to where both spouses work in the business. By this comparison, it could be argued that the new tax proposal addresses tax unfairness between these two types of couples.
Posted by: Lindsay | March 30, 2011 at 10:57 AM
Lindsay, so I got it totally wrong when I told the media that people who are self-employed couldn't take advantage of this provision because they can "income sprinkle" by employing a spouse in a business anyways! You should write about the implications of income splitting etc for the self-employed for Economy Lab in the Globe and Mail, they would love it - we can talk about this off-line.
Posted by: Frances Woolley | March 30, 2011 at 11:15 AM
There is value to work done in the home, but why should DIFs(dual-income families) receive a tax break which they can use to pay someone to do their chores for them? My wife stayed home for 13 years to raise our 5 children. She now works part-time...but would really prefer to stay home. Now that our kids are all in school, I won't try and make the case that she needs to be at home and that we have the same need for a tax break as when our kids needed to be cared for during the day.
BTW, we paid out-of-pocket for a cleaning service during a period when our twins were under 2. Not a lot of housework gets done when there are a couple of kids in diapers at home.
People can argue against income-splitting, but there are two realities that can't be ignored: a) we have pension-splitting and b) CRA doesn't give a hoot about which spouse earned the income when it comes to determining eligibility for tax-delivered benefit payments. Seems to me we are doing everything BUT allowing some form of meaningful income-splitting for all, especially the 30% of families who look after their own children at home.
There also isn't a deduction for most expenses incurred to be employed (transportation, clothing, meals), so married individuals don't have any more of a case for special consideration here than do singles.
Finally, I guess my question is what is Canada's view on families having children. If they're not important, let's turn the daycare expense deduction into a credit, for starters. If they are important, then let's encourage more families to have an at-home spouse, because scan few of DIFs are ever going to have 3 or more children, and this is the level that is required to keep our economy growing.
Posted by: Pat Coghlan | March 30, 2011 at 11:16 AM
The G&M comment that triggered this article:
"...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..."
shows why this policy is so appealing for a lot of people. Instead of comparing themselves to families with a comparable income, stay-at-home families are comparing themselves to 2-earners of the same class. I'm not sure of a way of changing people's reference point.
"It would almost never be worthwhile for a person to pay for full-time child care in order to earn $25K in the labour market - it would be far more profitable to open up a home day care."
75/25 was an extreme example, but what about a 120/60 family vs a 180/0 family. I'll agree that some transferability between two working parents makes a lot more sense than outright income transfers to subsidise stay-at-home families that already have significant tax advantages. Still, as someone who could potentially benefit from tax splitting once my wife has graduated from law school (and assuming we have kids), I still think it's the wrong approach. Its largest benefits target a group that already receives tax benefits - and has significant ability to increase their income if they so choose. It's a lot harder to increase earned income when your family is already putting in 80-100 paid hours every week.
And on a final note, could we please stop using the term "Mommy War." It's rather insulting to us men who are secondary income earners. Thanks.
Posted by: Neil | March 30, 2011 at 12:08 PM
Lindsay, the transferor is going to save up to 26% in tax on each dollar transferred to the business owner. Is the business owner going to decide not to draw $50K in salary/dividends so the other spouse can transfer $50K and save $12,000 in taxes? If the family still requires the same amount of income, splitting isn't going to give them free money.
Posted by: Pat Coghlan | March 30, 2011 at 12:08 PM
"GAI payments for kids create incentives for people to have children when it might not be the best thing for their long-run economic prospects."
Don't we already have GAI for kids with our refundable tax credits and grants?
How do we encourage a higher birth rate (trying to nudge ourselves back up to the replacement rate) without giving incentives to people for whom it is not in their long-run interests? I'm genuinely curious.
Posted by: Andrew F | March 30, 2011 at 12:20 PM
"Lots and lots of people do live without employment income. Are they employable? What's the cost of providing the housing/clothing/internet access/phone access/transportation/literacy training/language training/mental health counselling/child care/disability supports that would be required to make them employable?"
What are we contrasting with? Welfare doesn't cover all these costs either. I'd imagine that, as part of a GAI scheme, there would be additional supports for people with disabilities, children, etc.
Maybe I don't understand what point you wanted to make? That GAI is not a comprehensive social safety net?
Posted by: Andrew F | March 30, 2011 at 12:24 PM
Neil, the 100/0, 75/25 and 50/50 numbers refer to percentages, not $$$.
In general, a family's tax liability is based on the luck-of-the-draw of the income split between the spouses, with the "luckiest" families (w.r.t. after-tax income) being those who able to achieve the ideal 50/50 split.
It should not work this way, and it *doesn't* work this way on the benefit eligibility side.
Posted by: Pat Coghlan | March 30, 2011 at 12:34 PM
Frances, self-employed people cannot sprinkle income in the same way as they can only pay wages if the spouse is actually performing services/duties that warrant the wages. Owners of incorporated businesses, which include most physician, dentists and optometrist types, already can split income to their spouses and children 18+ years old through the use of discretionary shares and with family trusts they can split income and make use of multiple life time capital gains exemptions when they sell their business. These tax planning alternatives are not available to wage earners or unincorporated businesses. When dividends are used to split income, up to $30,000 in dividends can be paid to a spouse or >17 child (or in the case of a trust any other beneficiary) and if that is their only income, they pay no taxes. Thus total taxes paid on these amounts are the 16% paid at the corporate level, assuming it is active business income. I suppose some would say that advantage is unfair and in need of some new tax laws as well.
Posted by: Bruce M. | March 30, 2011 at 01:01 PM
Declan: re: treating individuals & families fairly.
The tax system is supposed to be based on ability to pay. For tax purposes, we still treat everyone as a single filer (for example, there are only individual - not joint - tax brackets). There isn't a lot that distinguishes a single filer from a married one.
Because everyone is subject to individual tax rates - which are quite progressive (steep) - transfers to a spouse can be quite a benefit, which is why pension/income splitting is probably not the ideal solution...but it's the only one proposed so far.
How would you change the system to create more equity between single and married tax filers?
Posted by: Pat Coghlan | March 30, 2011 at 01:07 PM
Pat: "How would you change the system to create more equity between single and married tax filers?"
Why should the fact that I'm married be any more relevant to my tax situation than the fact that I have kids/roommates/a dog/friends that I share resources with?
If anything, as Determinant has argued above, singles should pay *less* taxes than married people at the same level of income, as they don't enjoy the benefits of having a partner.
Where there are penalties to marriage are at the bottom end of the earnings distribution. I know one gay couple who advocated passionately for the right to get married, and the only impact it had come tax time was that the lower earning of the two gentleman lost his GST credit. I would advocate reforming the Canada Child Tax Benefit to reduce the marriage penalty that's built into that program.
But for the higher income families that would see large benefits from income splitting - no, sorry, I don't see it.
Bruce M: "self-employed people cannot sprinkle income in the same way as they can only pay wages if the spouse is actually performing services/duties that warrant the wages" - remember what I said in the post about positive assortative mating. The typical high income professional has a highly educated spouse, who generally would be capable of performing services/duties to warrant the wages. Hopefully Lindsay will comment on this, as she's one of the more knowledgeable people in this area.
Pat: "In general, a family's tax liability is based on the luck-of-the-draw of the income split between the spouses, with the "luckiest" families (w.r.t. after-tax income) being those who able to achieve the ideal 50/50 split." Honestly, if you had a job earning $100,000, would you think you were lucky if, one day, your boss came to you and said "we're cutting your pay in half" and then you went home and your spouse said "don't worry, honey, I've just found a job that will pay me $50,000." You'd not think "great" you'd think "we're having to work twice as hard to achieve the same level of pre-tax income."
And that would be true.
Andrew F: "How do we encourage a higher birth rate (trying to nudge ourselves back up to the replacement rate) without giving incentives to people for whom it is not in their long-run interests? I'm genuinely curious."
As you note, the current Canada Child Tax Benefit is, effectively, a guaranteed annual income. So the question is - if the Conservatives are so enthusiastic about family values/helping people with kids, why aren't they increasing that? In fact, they've deliberately chosen *not* to increase it during their time in office so far, instead introducing a new refundable credit payable to singles/couples, whose value does not depend upon the # of kids.
Let's say that we completely reject all eugenics arguments, any kind of argument that says that some kind of kids are better or worse than other types of kids. We'll just say that, ideally, programs that create incentives to have kids should provide equally powerful incentives across the education/earning/whatever else distribution.
If our pro-family policy took the form of increasing the base amount of the Canada Child Tax Benefit, it would create strong incentives to have children for a person with a low wage rate, but it wouldn't make much difference to a person with potential earnings of $100,000 a year. Highly educated women would still have little incentive to have kids.
Liberal governments have increased parental leave and introduced child care expense deductions. These give incentives for employed and higher income women to have kids, but doesn't create any incentives for unemployed people to have more kids. If you figure that CCTB is already creating pro-kid incentives at the bottom of the income distribution, then that kind of works out.
The family that ends up in the sour spot in the tax/benefit system is the one-earner two-kid family earning $80,000 or $100,000 a year and living in Toronto or Vancouver - it's really hard for that family to manage and they get almost *no* support.
Like I said, income splitting is not the way to go to help these families. Reducing the CCTB tax back rate for these families so that they get more support through the tax/benefit system is the way to go.
Posted by: Frances Woolley | March 30, 2011 at 02:09 PM
Frances wrote "Why should the fact that I'm married be any more relevant to my tax situation than the fact that I have kids/roommates/a dog/friends that I share resources with?".
Because it is a legal partnership recognized pretty much everywhere in statutes. A spouse has rights and privleges which are unique and not conferred to any other person or entity. Assets are considered "family" property. You and your spouse become a unit. Your family has a claim on your income and pension.
CRA clearly has no problem recognizing this unit when it comes to the provision of benefit payments. It tries to pretend that this unit doesn't exist when it comes to determining your tax liability, at which point everyone becomes an "individual".
I had to read your post a couple of times to understand your main points, which are:
Both are valid points, but do not address the problem of the large tax differential between one and two-earner families. I think this can only be solved by recognizing family income for tax purposes, which I feel is appropriate, given the special status of a spouse.
Posted by: Pat Coghlan | March 30, 2011 at 03:39 PM
And I am with you on that, Frances. My brother has been very fortunate to have a partner and I love them, but he has tangible advantages over my single income household in terms of security and flexibility.
On the subject of married filers, really, why should that matter? I lived in a student house with my brother, future sister-in-law and one other housemate. We shared rent and utility payments. Rent worked out to $350/head for a four-bedroom house. We didn't have to make a deposit for the hydro bill because it was registered in my name and my credit score was high enough that the municipal utility gave me (us) and exemption.
We were pooling our resources and expenses left, right and centre. We weren't married, but how was our situation different from a married couple economically?
Besides, this grand program, to be delivered in four years time, of interest to a great swath of prospective voters reminds me strongly of the much-hoped for National Pharmacare Program the Liberals promised repeatedly in the 1990's. I'm still waiting for that.
Posted by: Determinant | March 30, 2011 at 03:44 PM
Determinant: No legal relationship exists between yourself and your roommates/housemates. No one has a claim on your assets, income or pension. You can all pack up and move out at any time, notwithstanding some rent obligations.
Are you going to rewrite the entire Income Tax Act, beginning with the attribution rules?
Let's face it, the definition of a spouse is irrevocably entrenched in our legal/tax system. The dream of being treated purely as an individual by the tax system is just that - a dream.
The more I think about it, a joint tax return is the best way to go, but I will take income-splitting in place of the status quo. I think people are going to have to think about the best way to recognize a legal/common-law marriage in the tax system.
Posted by: Pat Coghlan | March 30, 2011 at 04:11 PM
No more than you are, Pat. I'm not going to rewrite it at all. My point is that shared relationships exist in all shapes and sizes. Presence or absence of a marriage certificate doesn't change the economic substance of what is happening.
Which is why income splitting is a bad idea and should not be adopted.
Posted by: Determinant | March 30, 2011 at 04:29 PM
Pat: ok, you made the point that married couples are different: ie their assets are joined. But so what? You need to make the case that they are *disadvantaged* compared to room mates. Financially, one wins and one loses. But assuming concave utility, the union is welfare increasing. And, it is after all a consensual arrangement and therefore Pareto improving. You simply haven't made *any* case that they deserve preferential treatment over room mates.
Posted by: K | March 30, 2011 at 10:33 PM
Frances: GAI for kids is not - to me - principally an issue of incentives. It's about child welfare and entitlement. All kids have equal claim to it. If you want to worry about incentives, then you could try things like: paying it directly to children who have left home before 18; creating a school voucher system and paying part of GAI as voucher - ie increase funding for education; paying part as a lump sum at the age of 18. It's for the kids - not the parents!
Posted by: K | March 30, 2011 at 10:56 PM
K: "GAI for kids is not - to me - principally an issue of incentives. It's about child welfare and entitlement."
Perhaps we're talking at cross-purposes. I hope we are.
Should there be payments for children? Yes. Absolutely. Call it family allowance, child benefit, progressa, whatever.
My position is simply this: there is no possible way of structuring a program that:
(a) provides a minimally adequate standard of living to people with no other source of income other than government benefits and
(b) doesn't create incentives for people to rely on government benefits rather than their own incomes.
Because if the benefits in (a) are enough to live on, there will always be some people who prefer them to working the night shift at MacDonalds.
By people I mean kids plus parents, as you can't give money to one without the other.
So there will always be a need for programs other than GAI. Unless you're prepared to say to people "if you don't work, you don't eat, GAI isn't going to be enough to live on." Personally, I'm not prepared to say that.
Posted by: Frances Woolley | March 30, 2011 at 11:13 PM
K: "You simply haven't made *any* case that they deserve preferential treatment over room mates."
Actually, I think I've been asking the question: if CRA is going to treat spouses like individuals for tax purposes, do people agree that they should be treated as individuals for benefit eligibility? If my wife has zero income, why is "her" half of the benefits determined by "my" income? Nobody seems to want to answer that question.
Do I think spouses need to receive *preferential* treatment vs singles? I think they deserve to be treated differently than singles...but the same as every other family with the same number of dependents etc.
Mostly, though, I want the problem of a family's tax liability being determined by the luck-of-the-draw of the income split between the spouses to be fixed. I think a joint income tax return similar to what they have in the US is the best way to do it.
Let me say that I DON'T simply feel that singles should be overly disadvantaged vs couples/familes. That said, BECAUSE there has been no action on the above for about 40 years and now that (to borrow Jonathan Chervreau's term) the genie is out of the bottle - thanks to pension-splitting - I think Canadians are going to get income splitting...which IS very disadvantageous towards singles. I just played poker last night at a friend's house. He and his wife are ~55 year-old empty nesters. He has no pension. She has a good government pension. He told me that 2010 was the first year they could split her pension down the line. They will be getting a very nice (thousands of $$$) tax return. Big advantage over a single filer.
Perhaps more than a "Mommy War" is happening.
Posted by: Pat Coghlan | March 31, 2011 at 08:49 AM
What Determinant said.
IIRC, a huge number - in the 30% range - of Canadians live alone, and yes, they are treated unfairly in several fiscal measures (my personal peeve is the Home Buyers' Plan - being single means you can only use $25,000 from your RSSP to buy a house, when a couple can use $50,000 and probably escape costly mortgage insurance). I've been wondering why this is never discussed anywhere. Maybe this huge minority should use this Conservative promise as an opportunity to start a national debate.
Posted by: Anonymous civil servant | March 31, 2011 at 11:27 AM
All this would be a lot simpler with a proportional tax and an equal income exemption for all taxpayers.
Solving a problem is a lot easier when you don't create one to begin with.
Posted by: Mike | April 02, 2011 at 05:01 AM
Mike: close, but not quite. (I think I'm right on that). You need a proportional tax and a GAI (negative income tax). The income exemption (instead of a GAI) still makes the tax system non-linear (you pay zero tax up to the exemption level, then a fixed positive rate thereafter, so there's a kink at the exemption level), so income-splitting would still matter.
Posted by: Nick Rowe | April 02, 2011 at 07:38 AM
Frances: I agree with all your premises, but disagree with your conclusion in the above comment.
"Because if the benefits in (a) are enough to live on, there will always be some people who prefer them to working the night shift at MacDonalds."
Agreed. But we have that problem already, with welfare. Unless we are willing to get very interventionist, and distinguish between those who are too lazy to get off welfare and those who can't reasonably be expected to get off welfare, we're stuck. GAI is just another name for welfare, but it has one advantage over welfare in that people have at least some incentive to get work: they get to keep (say) 50% of their earnings and don't lose their welfare.
Pat: "Actually, I think I've been asking the question: if CRA is going to treat spouses like individuals for tax purposes, do people agree that they should be treated as individuals for benefit eligibility? If my wife has zero income, why is "her" half of the benefits determined by "my" income? Nobody seems to want to answer that question."
I *want* to answer that question. But I can't. (If that makes you feel any better). Just another way of saying I recognise the force of your argument. We shouldn't treat benefits and taxes differently. A benefit is a negative tax, a tax is a negative benefit, and it is net taxes (taxes minus benefits) that matter.
I think the underlying problem is that we don't (can't) measure home production. Conceptually, these problems would disappear if we could measure the value of home production, and tax it the same as market production.
Posted by: Nick Rowe | April 02, 2011 at 07:57 AM
Nick, In response to your responses to Mike and Pat - I think Mike's probably imagine a system where there is a spousal exemption equal to the personal exemption for people who have an income-less spouse. On taxing home production - the socially optimal ideal is: from everyone according to his/her ability. It is only when ability becomes unobservable that taxation becomes interesting.
On GAI:
GAI and a minimum wage start to look different with an informal economy, where employers and workers can collude to allow workers to (a) work and collect an informal sector paycheque and (b) still collect the guaranteed annual income.
Welfare is very different from a guaranteed annual income in a number of ways. As you know, it's interventionist, so it does to some extent distinguish the lazy and the incompetent.
One of the most important ways in which welfare differs from a GAI is that there are asset tests, which limit the ability of the individual with the thriving drug operation (say) to collect welfare.
It also provides income now for people who need it now, as opposed to the long time lag for programs delivered through the income tax system like child benefits.
Welfare tax back rates actually differ quite a bit from province to province - quite a few have various carrots to get people back into the labour market.
Posted by: Frances Woolley | April 02, 2011 at 08:24 AM
The CTV poll today shows the Harper conservatives starting to pull away. Whether people agree with income-splitting or not (I personally prefer the US joint filing provision which increases tax brackets by 175% for couples instead of the 200% that results from brute force income-splitting) it should be pointed out that if the 30% of one-earner families headed by two spouses vote as a block, this is more than enough to give Harper a majority.
I've come to the conclusion that it's impossible for any party to provide clear objectives for major social/tax policy change, since it runs the risk of alienating one or more groups. Instead, it's all about votes. Now that retired couples have had a taste of pension-splitting, they are NEVER going to give it up. I've heard from friends - now able to pension-split...in their 50s! - who have voted Liberal their entire lives but are now thinking of voting CPC.
Families with one spouse earning most or all of the family income aren't going to give up on this long-sought opportunity for tax equity either.
To borrow a phrase from Al Gore, "the debate is OVER".
Posted by: Pat Coghlan | April 04, 2011 at 09:25 AM