It's a seductive idea: Reward stay-at-home moms for unpaid child-rearing work, while eliminating tax inequities between single-income and two-income households.
That explains why Conservative Leader Stephen Harper made income splitting his first major campaign promise.
The Conservatives pledged Monday to let families with children share $50,000 of their household income once Ottawa eliminates the deficit in four years. The plan would allow a family's main breadwinner to shift taxable income to a less-taxed spouse or dependent children. The Conservatives estimate the measure would save as many as 1.8 million Canadian families an average of $1,300 a year at a cost of $2.5-billion.
Canada already allows elderly couples to split pension income, a measure introduced by the Conservatives in 2006. Canadians can also shift some income with spousal RRSPs, tax-free savings accounts, college tuition fees and the child tax benefit.
The benefits would flow mainly to wealthier Canadians. A family headed by someone in the top 2011 income bracket ($128,800) would save more than $6,000. Working families in which the top earner makes less than $41,544 wouldn't get anything. Nor would single people, including divorced parents. Income splitting is also a complex way to encourage a parent to stay home, creating lots of work for accountants.
That partly explains why the vast majority of OECD countries (21 of 30) don't allow sharing of employment income within families.
While income splitting offers fairness of one kind, it introduces fresh inequities. It tilts the tax system in favour of single-income families, including childless ones. And they're typically better off than other Canadians.
The most serious flaw is that employment income isn't a fair measure of real living standards, Simon Fraser University tax expert Jonathan Kesselman argued in a 2008 study for the Institute for Research on Public Policy. Single-income families are typically better off financially than two-income couples because they have lower work-related expenses (transportation, clothing and the like) and don't have to pay for child care, housecleaning or other household needs, Mr. Kesselman concluded.
What's more, income splitting raises the marginal tax rate of the lower-income spouse (typically the wife), dissuading them from working. Experts say that's not the right signal to send as the baby boom generation prepares to retire, leaving a gaping hole in the labour market.
At the end of the day, there are better ways to achieve similar social policy objectives, said Erin Weir, senior economist at the International Trade Union Confederation in Brussels.
"It makes sense for the government to help families taking care of children," Mr. Weir agreed. "The question is: For a couple of billion dollars, is this the best way of doing that? … I'd much rather see investments in child care or parental leave, and tax measures that benefit people at the lowest income levels."
And if the goal is to lower Canadians' tax burden, just cut income-tax rates for everyone or remove the lowest income earners from the tax rolls, said Andrew Sharpe, executive director of the Ottawa-based Centre for the Study of Living Standards, an independent think tank.
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