When the Conservative brain trust sits down to hash out a crowd-pleasing alternative to income splitting, hoping to undo the damage from backing off a key 2011 campaign promise, experts say there will be plenty of options on the table.
Critics of the controversial, three-year-old proposal – and there are many – say allowing spouses with children under 18 to share up to $50,000 of their income for tax purposes does little for low-income families and encourages one of the parents to stay out of the work force.
The C.D. Howe Institute and the Canadian Centre for Policy Alternatives alike say roughly 85 per cent of households would gain nothing from the proposal, particularly single parents.
Some 40 per cent of the benefits would go to families earning more than $125,000, for whom the change could be worth $6,400 a year, the institute calculates. That would likely include Prime Minister Stephen Harper, who makes $320,400 a year and has two teenage children.
If the Conservatives want to provide tax relief for more families with children, there are some alternatives, said Alexandre Laurin, who co-authored the 2011 study. Increase the universal child care benefit, which gives $100 a month to families with children under six, he offers.
Kevin Milligan, an economics professor at the University of British Columbia, suggests extending the age range to older children, to the benefit of both low and high-income families.
Another example, the Canada child tax benefit for families with children under 18, provides a certain amount per child and is phased out by income level. And widening the employment insurance provision for parental leave would give parents to spend more time with their children, Laurin says.
But his personal preference would be an across-the-board tax cut and, as Finance Minister Jim Flaherty has suggested, paying down the $619-billion federal debt.
“The more you lower the tax rate, the less the need for income splitting, if the intention was to equalize the tax burden between two types of families,” he says. “It’s just simple arithmetic.”
University of Calgary economist Jack Mintz argues it’s time to change the tax system so single-income families aren’t facing a higher tax rate than other households. The income-splitting proposal can be tweaked so different families can share the benefits, he argues.
Right now, one spouse can transfer the unused portion of the basic personal tax exemption to the other spouse. One alternative would be to make that personal exemption non-transferable if they decide to take advantage of income splitting.
“Between income splitting and this provision, you actually create a lot of equality between families of different types,” Mintz says. “Because to me, this whole issue is how to treat families of different types.”
If the Tories were to lower the $50,000 transfer limit on the original proposal – $25,000, for example – they’d not only save on the cost of income splitting, it would also help middle-income families, says Mintz. Or it could also be clawed back from higher-income earners.
David Macdonald, the chief economist with the Centre for Policy Alternatives, says the Tories should abandon the income-splitting proposal entirely because it only helps wealthy, single-earner families.
“It’s sort of like a poison,” Macdonald says. “If you take too much poison, it’s going to kill you. If you take a little less poison, maybe you’re just going to get a sore stomach for a couple of days, and then if you take even less poison, maybe you’ll only get a headache.”
If the Tories want to help families with children, they could look at existing child-based benefits, such as the national child benefit supplement, he suggests. It provides monthly payments to low-income families with children, no matter if it’s one or two parents, and reduces them as they earn more income.
The working income tax benefit, meanwhile, helps single parents in particular by giving them an extra boost to join the workforce. “If you’re looking at helping families with children, it’s quite clear that these other measures are ones that are more effective.”
Finally, says Macdonald, a national child-care program would cost about the same as the income-splitting plan, which is estimated at upwards of $2.5-billion a year.