Income splitting… dumb but not for the reasons you’re thinking of

Tax

 

Really, I’m a bit of a statist.

Putting aside my utter distrust of everything the government does in a law enforcement and spying context, I tend to think that government programming for the whole country tends to make the whole country better.

Public transit, healthcare, paved roads — these are things I tend to think make countries better.

So narrow tax breaks, for me, are usually a turn-off.

Naturally, income splitting is not something I’m waving a flag for.

As someone who is single, without children, and isn’t a volunteer firefighter, paying for a live-in caregiver, or running a forestry operation, I admit some bias in hating our tax code.

The Kafkaesque absurdity that is filing taxes in this country should, in my humble opinion, be scrapped.  Rather than staffing a skyscraper full of bureaucrats to manage this system, and funnelling demand into an open market of accountants who ensure that the rich pay as little as possible, creating a meritocracy out of taxation; perhaps we could just make things simple.

Abolish virtually all of Canada’s tax credits, create new tax brackets to offset effects on low-income families, and reduce taxes all around.  It’s cost-neutral, and good for business (except H&R Block.)  Hurrah.  Everybody’s happy.

But that won’t happen.  You know why?  Because, as much as the government likes to claim that boutique tax credits are about encouraging positive activity: they’re not.

See, there’s a factor in assessing the usefulness of tax credits — the uptake rate.  Basically, it’s the consideration of how many of the eligible taxpayers will take advantage of the credit.

For example, the Parliamentary Budget Office found that, for the child fitness tax break, only 42% of families eligible took advantage of it.  Only 65% were even aware of the credit at all.

To that end, the supposed public policy objective of these sort of tax credits is obviously muddled.  If a paltry four-in-ten families are taking advantage of a tax credit — many of whom, likely, are just continuing to send their kids to sports, and getting a free tax credit in the process — evidently, the public policy objective of encouraging fat kids to get in shape isn’t working tremendously well.

Ottawa would likely be more successful in getting kids active by mailing a pair of skates to every child, or releasing wolves in dense urban centres.

Which brings us back to income splitting.

Now, I’m finding it notoriously hard to find Finance Canada’s uptake projections for income splitting or, indeed, any tax credit — indeed, they might not be public — but consider this: income splitting, by design, will only be taken advantage of by those who think to claim it on their tax return (or who have good accountants), and any projections on the cost of income splitting will likely be inaccurate.

The former is definitely true, and latter may-or-may-not happen.  It depends on how Finance structures their projections.

So, this is to say: tax credits, or schemes like income splitting, are confusing, complex, and are only ever taken advantage of by a proportion of those that they are intended to help.

That’s my problem with income splitting.  That it’s inefficient, and more of a PR stunt than an effective federal policy.

But, so long as we’re going down this road of throwing out tax loopholes for the sake of encouraging social norms, income splitting isn’t so bad.

And the bombast that has come from the ardent opponents of income splitting is just too much for me.

What does it do?  It sends a targeted tax break of a few hundred bucks to families with kids.  Yes, it also puts about two grand into the pockets of well-to-do families.  Somewhere between a few hundred thousand, to a couple million families, all-in.

Would that money be better spent, say, building houses for the homeless, paying down the debt, or put into hovercar research?  Yup, probably.

But, evidently, this government wants to give it back to the people — well, some people.

So long as it’s only going back to a subset of the population, it’s probably better to give the money back to parents with kids than to hand it out by way of a Vespa scooter tax credit, or a tax credit for everyone who wears purple hoodies.

Now, there’s a lot of chatter about how sexist and regressive this plan is.  I disagree.  Sort of.

It’s no huge secret that women get paid less than men.

Wives make about a third less than their husbands.  (The difference is slightly larger for unmarried women.)  There are about two-and-a-half times as many households where a male is the sole breadwinner as there are households where it’s a woman.  (Naturally, some of these are same-sex households.)  Median household income for women, where they are the sole earner, is about 40% lower than it is for men.

All those things are true, and bad for equality.

Income splitting won’t, necessarily, exacerbate those problems.

For one, it’s rather reductive to assume that, at the thought of an extra $2,000 a year, husbands across the country will be instructing their wives to stay home and earn nothing.  Obviously, families would lose more than $2,000 if one of the earners quit.

Yes, it may lessen the imperative for women to get into the workforce after having children — in the process, lowering productivity and output.  But, looking at this from a feminist perspective: equality in the workforce should come about by creating equal standards and removing gendered barriers, not by leveraging economic necessity to force women into the workplace.

The language around this that is often employed is that income splitting ‘incentivizes’ women to stay home.  That’s a largely rhetorical argument, though.  To turn the language around: income splitting reduces the economic necessity that forces some women into the workforce.  Sounds less bad, doesn’t it?

To turn the whole thing on its head, think of it this way: allowing income splitting effectively reduces the differentiation between male and female incomes, should the husband decide to hang up his spurs and become a stay-at-home dad.  That $2000 is about 12% of the $16,000 difference in the average earnings between men and women.  So if a man is making, saying, $45,000 and his partner is earning $40,000 — without incoming splitting, it may be a clear choice for the lower-earner to stay home.  With income splitting, that $5000 gab shrinks to $3000. From that perspective, income splitting looks downright progressive.

The fact is, this is complex.  It’s nearly impossible to say that income splitting will have one societal effect or another.  Maybe it will encourage more women to stay at home with their kids — ideally, women will make that choice themselves.  Maybe it will encourage more dads to stay at home.

More commonly, though, it will be free money for couples that are doing nothing differently.

To that end, income splitting is still a bad idea.  But it is not discriminatory.  It is not sexist.  It isn’t even that costly.  At $2 billion a year, income splitting costs about the same amount as 108 armoured vehicles that we were supposed to buy, and didn’t.  And that’s to say nothing of an uptick in spending that comes along with decreasing taxation.

So, there.  That’s how I feel about income splitting.

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