Income Splitting and Progressive Taxation
Nov 1, 2014

Income Splitting and Progressive Taxation

The motivation behind the idea of Income Splitting is quite reasonable. Namely, under the current scheme, two families with identical total income can be taxed at substantially different rates, depending on how that income is distributed between both parents. Given the fact that families do very often function as a singular economic unit dividing up total income among the family and not individual income, this makes little sense. 

The problem is that in Harper's attempt to fix this asymmetry - a problem probably worth addressing - further asymmetries were introduced. In particular, the bill is highly regressive. At the bottom it helps single parents not one iota. And it helps low income families whether neither parent makes a higher income not one iota. But it helps families with one high income earner and someone who stays at home to raise the kids a tonne. That is, much more often than not it is helping out higher earning families than it is helping lower earning families. 

The result is a shift that makes our tax code less progressive on average. I have long advocated for policies that attempt to be at least neutral on the progressive/regressive spectrum. I would be OK with trying to remove that asymmetry, or at least removing it to some degree, if it was coupled with further policies that didn't tilt the spectrum so badly. For instance, one could imagine switching to the US model of allowing joint fillings (a sort of uncapped Income Splitting; Harper's version caps it at $50,000 transferred and $2000 profited), if this was coupled by a change to the income tax code that made it more progressive, or added benefits to single families or other ways to help out lower income families. Doing this would help to limit the odd asymmetry that the Conservatives have identified when motivating this policy, without the consequence of making our tax code less progressive.

Even the premise - that families with equal income ought to be taxed equally - doesn't necessarily hold. There are meaningful differences between a family with two parents who make $30,000 a year and a family where one parent makes $60,000 a year, such as the fact that in the former you probably have twice the number of hours being worked. I'm not convinced these two situations really ought to be taxed identically, nor that this asymmetry is a more important one than many others such as the asymmetry between single parent families and dual parent families which often have stark differences in the length to which resources go. 

In many cases, what can seem "fair" when one looks a specific policy such as a specific tax, turns out to be rather unfair when looking at society as a whole. Consider the idea of flat taxes, where everyone is taxed at the same proportion of their income. When thought of one its own, this seems like a very fair tax system and indeed many on right advocate for it and to some extent I can see why. The problem is that we live in a rather regressive world. The case for progressive taxes is to in some sense balance out the inherently regressive nature of our capitalist society so that when considering all these factors - and not just taxes - we get something a bit more equitable. So a "fair tax" may not actually be all that fair, and Income Splitting is precisely one such example. 

The political angle:
As Harper starts gearing up for a new election (and years of squeezing and some fancy accounting after many years of Harper deficits give us a surplus once more), he has been dribbling out various populist policies like this one. They are all tax cuts (he is a Conservative, afterall) but ones that are very targeted. There is the increase of the child fitness tax credit (which I support in principle, but rather it wasn't a tax credit which is an inherently regressive move when one has a progressive tax system). There is the increase of the TFSA to $10,000 per year which I have opposed with qualifications here. And now we have the income splitting move. 

These are quite different than Harper's initial big tax moves which cut the GST (which I support as the GST being a flat tax is bad for the regressive/progressive system) and cutting corporate tax rates (which I oppose). Both of those are big moves. These are much more targeted. And they are targeted right at their upper middle class, largely white Conservative base. To someone making $100,000 a year with a stay at home wife, they can get taxed less by splitting their incomes, get tax savings when they save, get tax savings when they put their kids into hockey, and so forth. To the single parent struggling to make ends meet, none of these do anything. It is one demographic being helped and another (one much more in need of help) being ignored. And it is a demographic being helped that the Conservatives know will help them win elections. 

While I can see the motivation and the appeal, I don't believe this is being done because the Conservatives think it is the right thing to do. Even former Finance Minister Jim Flaherty infamously believes it is not the right thing to do. They are doing it because it is a good political move. 

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