With an anticipated return to a balanced budget by 2015, next week’s federal budget will raise expectations that Prime Minister Stephen Harper will deliver on his 2011 election promise to introduce income splitting for families with children.
Such a move would be costly in terms of lost government revenues, will increase rather than diminish family income inequality, and is bad social policy.
Income splitting has long been advocated by social conservative groups, such as REAL Women of Canada, who want to use tax policy to support the traditional family with one breadwinner and a stay-at-home spouse (usually a woman). They argue that the personal income tax system penalizes such families.
A single-earner family sometimes pays more in tax than a two-earner family with the same income, since tax is levied at a progressive rate on individual incomes, rather than on family income. For example, a one-earner family with an income of $100,000 will pay somewhat more in tax than a family which has two earners, each with an income of $50,000.
While this may suggest unfair treatment, bear in mind that the two-earner family usually has significantly higher costs. Most families with preschool-age children must pay for child care, commuting and other costs that are only partly compensated for by tax deductions.
The traditional family also enjoys more free time that can be used to produce goods and services in the home. Time-pressured two-earner families rely more on the market.
It has to be noted that there are now very few families with children with a full-time, stay-at-home spouse. By desire, or the necessity for two incomes to pay for a mortgage and meet the costs of raising children, 78 per cent of women with school-age children are in the paid labour force, as are 66 per cent of mothers of preschool children.
Family income splitting would allow families with children to transfer up to $50,000 of income between spouses, resulting in potentially large tax savings if one spouse is in a much higher tax bracket than the other.
Currently, each parent pays income tax on her or his individual earnings, at a federal rate of 15 per cent on taxable income of less than $43,561; 22 per cent on earnings between $43,561 and $87,123; 26 per cent on earnings between $87,123 and $135,054; and 29 per cent on earnings of more than $135,054.
Income splitting would provide no benefit at all to single-parent families, nor to two-earner families where both partners have earnings that put them in the bottom tax bracket. There is limited potential for tax savings where two partners have earnings in the middle tax brackets, but savings would be significant if taxable income can be shifted from one spouse in a high tax bracket to the other in a low tax bracket.
The maximum income-splitting benefit of more than $6,000 a year would go to a very-high-income family in which one partner has income that exceeds the threshold for the 29 per cent top tax rate by more than $50,000 (i.e. an income of more than $185,054) and the other partner has no income at all. In that case, most of the $50,000 that could be split would be taxed at a rate of 15 per cent, instead of 29 per cent.
Analysis by the C.D. Howe Institute and the Canadian Centre for Policy Alternatives (CCPA) shows that the benefits of family income splitting would go disproportionately to very-high-income families. The just-released CCPA study calculates that 86 per cent of families would get no benefit at all, and that 60 per cent of the benefits would go to the richest 5 per cent of families.
These studies agree that family income splitting would cost about $3-billion a year in forgone federal government revenues, and about $2-billion more if the provinces followed suit.
Family income splitting would also have perverse implications for the job market. While the decision to share income for tax purposes would be voluntary, use of income splitting would raise the marginal tax rate for the lower-earning spouse, usually a woman. This creates a disincentive to work. A family with one high-income earner in the top tax bracket would see a significant increase in taxes if the lowest-earning partner decided to return to the paid work force, or to move from a part-time job to a full-time job.
The traditional family structure that would be supported by income splitting is favoured by social conservatives, but has negative implications for women. The proposal assumes that income is fully shared in the family, and implicitly promotes the economic dependence of women upon men. Prolonged absences from paid work make women more vulnerable to poverty in the event of marital breakdown.
While there is a case for expanding child care choices for families with young children, one has to question a costly measure that would deliver large benefits mainly to affluent families, including those with school-age children who do not need full-time care in the home. There are much better alternatives.
The federal government could increase the current maximum duration of 50 weeks of combined maternity and parental benefits under the Employment Insurance program, and improve modest parental leave benefits. (The current average is $388 a week.)
Alternatively, the federal government could increase refundable child tax credits for low- and middle-income families, such that a temporary leave from work by one partner would generate higher benefits than is now the case.
Family income splitting amounts to a costly subsidy to a small minority of high-income families that have opted for one partner to stay at home or to work part-time. That is an entirely legitimate choice, but not one that should be actively promoted through tax policy.
Andrew Jackson is the Packer Professor of Social Justice at York University and senior policy adviser to the Broadbent Institute.