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Politics Flaherty’s doubts about income splitting are one step to addressing inequality

This week has been a watershed moment in the battle against income inequality in Canada.

The curious twist is that it was comments made by a Jim Flaherty – who, as Finance Minister, has actually exacerbated income inequality – that illuminate a fundamental shift in Canada's political imagination.

Sometimes, the world works in mysterious ways.

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A lot of ink has already been spilled about Mr. Flaherty's unexpected decision to publicly repudiate family income splitting, the day after tabling a budget that set up the Conservative government to deliver on precisely this tax cut. After all, it's not every day that a finance minister chooses to oppose a key electoral promise of the prime minister.

Mr. Flaherty's comments immediately split the Conservative caucus, forcing Prime Minister Stephen Harper to cast doubt publicly on what was expected to be the core goody in the Conservative's re-election arsenal.

While the political questions surrounding Mr. Flaherty's decision to speak out are intriguing, it is the precise words that Mr. Flaherty used to articulate his opposition to income splitting that matter most.

"It benefits some parts of the Canadian population a lot. And other parts of the Canadian population virtually not at all," Mr. Flaherty said. Earlier, he had mused that the tax measure needed "a long, hard, analytical look" by experts "to see who it affects in this society and to what degree. Because [he wasn't] sure that overall it benefits our society."

Given this government's clear track record of introducing boutique tax initiatives that favour the wealthy, this sudden concern with equity is striking.

Mr. Flaherty, of course, is right about this $3-billion Mad Men giveaway.

Family income splitting would benefit only a small minority of families, giving a significant tax break to high-income traditional families with one earner and a stay-at-home spouse, while delivering little or nothing to middle- and lower-income families and nothing to single parents.

According to the Canadian Centre for Policy Alternatives, the top 5 per cent of all families would see more benefit from this tax change than the bottom 60 per cent – and 86 per cent of families would see no benefit at all. It would, in effect, actively make income inequality, not to mention gender inequality, worse.

But the Conservatives surely knew these troubling facts when they made the promise (emphatically and repeatedly) to introduce income splitting back in their election platform in 2011. So something changed in the world around Mr. Flaherty.

And that something, I believe, is the maturing of income inequality as an issue in the imagination of the Canadian public and, as a result, in the considerations of the politicians that serve us.

It is this maturing that allowed Mr. Flaherty not only to recognize that income inequality is a serious problem deserving of attention; but also to acknowledge that government – even Conservative governments – should not enact tax policy that deliberately makes the situation worse.

The story of how this change came about is yet to be told, but it no doubt has its roots in the tireless work and advocacy of citizen and civil society groups, academics, brave politicians and other equity-seeking voices. This change remains a tentative victory, as Conservative cabinet ministers continue to pop up this week to split with Mr. Flaherty and defend family income splitting and its genesis in the determined lobbying of social conservative pressure groups.

And the unfortunate reality is that we are still becoming ever more unequal, a trend due in large measure to political choices. Many countries have found ways to mitigate the growth of income inequality, while in Canada the policy response has tended to reinforce rather than offset the trend.

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We know that since the mid-1990s, the social role of government has been dramatically cut back and its redistributive impact has faded. According to the OECD, government taxes and transfers lowered the gap between rich and poor most in Canada, Denmark, Finland, and Sweden in the late 1980s and the early 1990s. By the early 2000s, we joined Switzerland and the U.S. as the countries with the smallest redistributive impact.

That's why I take caution not to overstate things here. But I do believe Mr. Flaherty's remarks signal some hope that there is growing public support and political will to address income inequality. At the very least, important public policy will now be tested against a simple and compelling principle: Does this make income inequality better or worse?

Rick Smith is executive director of the Broadbent Institute.

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