Economics and politics are on Flaherty’s side in income-splitting feud

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The Finance Minister is doing battle with his party's election platform. Jim Flaherty isn't keen on the Conservative pledge to provide income-splitting tax breaks.

It's economics against politics. The economics of income-splitting have been savaged. But is it good politics?

The Conservatives promised it in 2011, but it probably doesn't fit what they need in 2015 – a big tax cut that the opposition can't refuse.

Stephen Harper's Conservatives obviously thought income splitting was politically valuable in the last election, when they proposed a break that would allow a couple with a child under 18 to transfer $50,000 of one parent's income to their spouse for tax purposes.

It was labelled the Family Tax Cut, and sold as a measure that would help families with kids. But its real political goal, aside from pleasing some social conservatives, was to attract the attention of the small proportion of families who would really benefit: mostly single-income families where one parent earns a good salary and the other stays at home. It would be a big tax break for them, one that might motivate them to go out and vote Conservative. The only catch was that it wouldn't happen until there is a budget surplus.

But now that a surplus is expected next year, Mr. Flaherty has qualms. Another cabinet colleague, Employment Minister Jason Kenney, said he thinks the Conservatives have to follow through, but the Finance Minister's qualms amount to opposition.

"I'm not sure that, over all, it benefits our society," Mr. Flaherty said. He added: "It benefits some parts of the Canadian population a lot and other parts of the Canadian population virtually not at all."

He's right: a C.D. Howe Institute study found 85 per cent of households would get nothing from the $2.7-billion-a-year measure, and only 9 per cent would reap more than $500. But for a few, like single-income families earning more than $125,000, it means thousands of dollars a year.

There's other problems with the economics. It would make single-income families pay less taxes than two-income families. It would discourage stay-at-home spouses, still more likely to be women, from entering the labour force, by making it the financial gain much smaller. Mr. Flaherty's officials in the Finance Department must have told him there are better tax cuts.

But politically, it probably no longer fits the bill, either.

The Conservatives have favoured niche tax cuts, like tax credits for kids sports or a tradesperson's tools, because they don't cost much and attract votes from specific, targeted groups of potential Conservative supporters.

In 2015, however, they'll be in a different position. Tuesday's budget suggests that by then, they'll be able to project $40-billion or $50-billion in surpluses over the following five years. The last thing they want is for their NDP and Liberal opponents to use that as an argument for funding big new programs in their election platforms. It's more likely that the Conservatives' 2015 budget will offer tax cuts to make most of those projected surpluses disappear. That would box in Thomas Mulcair and Justin Trudeau: they'd have to say they'd raise taxes, or there'd be no money for their campaign promises.

But that would only work if it's politically damaging to undo the Conservative tax cuts. But it's relatively easy to oppose income splitting. It benefits few people. It mostly helps the well-off. Those who don't get it will likely see it unfair – not just two-income couples, but single-income couples with a child over 18, or with no kids. Promising to undo it might win votes. And then Mr. Mulcair or Mr. Trudeau could make multi-billion-dollar election promises.

It would be a lot more dangerous to pledge to undo a tax cut that's substantial, and visible, and affects a lot of people – like Mr. Harper's 2006 cut to the GST. If the Conservatives deliver a big income-tax cut, an expansion of the $100-a-month universal child-care benefit, or some other visible tax cut that affects half the population, Mr. Harper's opponents would fear taking it away.

Regardless of the economics, Mr. Flaherty has the politics right – so don't expect income-splitting as promised.

Blowing a third of future surpluses on income splitting opens a political weakness where the Conservatives want an advantage. It's a pretty good bet that income splitting won't go ahead except in some revamped, reduced way that whittles down the price tag to a fraction. They'll want to put the big money on a tax cut that's harder to oppose, and put their opponents in a bind.

Campbell Clark is The Globe's chief political writer.