Finance Minister Jim Flaherty appears to have had a change of head and heart on income-splitting – a policy the Conservative government has long promised to bring in once the federal budget is balanced.
Mr. Flaherty raised strong doubts about the idea on Wednesday, saying he’s “not sure that overall it benefits our society.” Other members of the government immediately scrambled to defend the proposal, saying it remains a key part of their plans.
But Mr. Flaherty is right. Income-splitting needs to be reconsidered, or abandoned in favour of a better use for the federal surpluses that should begin to appear next year. If the government wants to cut taxes, this isn’t the way to do it.
The Tory proposal was ill-considered from the start. Included in the 2011 election platform, it would allow couples with children under 18 to split up to $50,000 of income; if the members of the couple are in different tax brackets, it would reduce their taxes. It’s a tax cut – but it would mostly benefit a small number of upper-income Canadians.
A 2011 report from the C.D. Howe Institute said any gains would be “highly concentrated among high-income, one-earner couples” and generate a “pure windfall” for those who are in the best position to have one parent at home. The program would also provide a disincentive for lower-earning spouses to go back to work. A recent paper from the Canadian Centre for Policy Alternatives described the program as “a tax gift to Canada’s rich.” The Conservative platform said the program would cost $2.5-billion a year in tax revenue; the CCPA estimate is $3-billion, plus another $1.9-billion if the provinces match it.
Single Canadians, with or without children, would receive no benefit from income-splitting. A two-income family with both spouses earning roughly the same amount of money, and hence in the same tax bracket? No benefit. But very large tax savings would accrue to one kind of family: a single-income family with one spouse in the top tax bracket, and one spouse earning little or nothing, and hence in the lowest tax bracket.
Or as Mr. Flaherty delicately put it, income-splitting “benefits some parts of the Canadian population a lot, and other parts of the Canadian population virtually not at all.” The problem isn’t just one of fairness. Given that the “some parts” benefited are a small minority, and the “other parts” are the overwelming majority, it also doesn’t add up politically.
With the next budget a year away, the government has time to get this right. On Wednesday, Mr. Flaherty explained that he was speaking out because “I’d like to think I’m analytical as finance minister.” His analysis is correct.