Finance Minister Jim Flaherty has made pension income divisible between spouses for tax purposes and has mused about extending this option eventually to all income. This latter proposal would benefit a wealthy minority at the expense of important public programs and create a disincentive for women to engage in paid employment. There are other and better ways to give working people more time and resources to care for their children.
Extending income splitting beyond pensions would not help the people who are most in need. Single parents, unattached individuals, and families with no employed or self-employed members would not be eligible. Families headed by seniors have already been covered by Flaherty's pension income split, but the millions of other Canadians who live in households with median market incomes of only about $20,000 a year would not benefit from further income splitting.
Approximately 18.7 million Canadians live in families with two or more earners. Such households could take advantage of general income splitting only if one spouse is in a higher tax bracket than the other. No benefit would be possible if both spouses are in the lowest brackets.
Only 2.8 million Canadians live in single-earner families, the ones most likely to gain from income splitting. However, a family of this type with an income of $36,000 or less could only save $200 a year through income splitting--the difference between the personal and spousal tax credits. By contrast, a single-earner family with an income of $230,000 would retain an extra $9,000. Income splitting would therefore be a huge gift to rich people whose spouses stay home.
This proposal would cost the federal government about $5 billion a year, greatly reducing the resources available to finance public services that benefit all Canadians. It would provide extra money to some couples in high tax-brackets at the expense of single parents, unattached individuals, seniors, and most working families.
Promoters of income splitting claim that it would equalize the tax burden between single-earner and dual-earner households. For example, they point out that a couple with one spouse earning $60,000 currently pays more tax than two spouses earning $30,000 each. There may be a theoretical argument that a household's tax liability should not change simply because it "chooses" to have one spouse work full-time for $60,000 rather than having both work part-time for $30,000 each. But very few Canadians enjoy such flexibility regarding their work hours. The more realistic scenario is that the single-earner family has one spouse working at a well-paid job and the other spouse doing unpaid work at home, whereas the dual-earner family has both spouses working full-time at less lucrative jobs and doing unpaid work at home.
A 1999 report of the Standing Committee on Finance unanimously concluded that "a dual-earner couple with the same total income as a single-earner couple is not as well off as the latter. Not only are there additional employment-related expenses that must be incurred with respect to the second worker, but the value of unpaid work in the home, or leisure, must also be taken into account."
The Ontario Fair Tax Commission noted: "It has been shown that single-earner couples may have greater ability to pay than two-earner couples with the same income." The current system of taxing individual income, with credits for dependent spouses and children, is clearly more equitable than income splitting.
The argument for income splitting presumes that spouses pool their income and benefit equally from it. While some families may organize their finances in this manner, many others do not. Uncertainty regarding income distribution within households is another reason to retain individual income as the tax base.
Income splitting would undermine the economic independence of women. In heterosexual couples with large income gaps, the woman generally has the lower income and faces the lower tax rate. Subjecting each couple to a common tax rate would increase the rate at which income earned by these women is taxed. Relative to the current system, income splitting would provide a disincentive for them to engage in paid employment. Not surprisingly, the leading advocates of income splitting are socially conservative groups which believe that women should stay home.
Parents should certainly have the option of caring for young children at home. However, giving $5 billion to couples in high tax-brackets is not a fair or effective way of providing this choice. More progressive policies could be implemented that would give working people more time and resources to care for their children. The Employment Insurance system should provide longer maternity and paternity leaves with adequate benefits:
- Labour legislation could be amended to ensure benefits for part-time workers, family-responsibility leaves, and regular work hours.
- Governments could develop a national child care program so that parents who need or choose to continue working full-time can access high-quality care for their children.
(Erin Weir is an economist with the Canadian Labour Congress.)