Why I Support Income Splitting
Income Splitting is a simple and sensible idea – it’s the idea that a couple should be able to divide their income between each other for tax purposes. It’s the idea that government should tax us based on the most meaningful metric of ability to pay – household income. Under the present system, tax rates are assessed based on individual income, but most people who are part of a family manage their money as families, not as individuals. Because of this, income splitting is fair and sensible.
Consider a comparison of 2 different families. In one family, one person works outside the home, and the other stays at home (perhaps to care for children, elderly parents, or a disabled relative or friend). The person in the traditional job has to put in long hours, and earns about $80,000/year. In another family, both people work outside the home. One person earns $50,000/year and the other earns $30,000/year. Both have a family income of $80,000/year, but under the present system, the first family pays more tax because they are in a higher tax bracket. That clearly is not fair. Income splitting provides a tax break for both families in this case, and it ensures that families with the same household income pay the same rate of tax.
In yesterday’s news, you may have see that a ‘think tank’ called the Broadbent Institute has come out opposing income splitting, claiming that it only benefits a small number of families, a large number of whom are in (*gasp*) Alberta. What is important to note in this context is that, despite claims to the contrary, the Broadbent Institute is essentially an arm of the NDP. In fact, the NDP recently ran afoul of Elections Canada by trying to funnel money from the NDP to the Broadbent Institute. We already know that the NDP does not support tax cuts for families, but their arguments against income splitting are poorly reasoned and disingenuous.
The central criticism made by the NDP/Broadbent Institute is that income splitting only benefits a small number of families. Here are a few responses to that:
1. Virtually all families would benefit from income splitting at some point during their life. It is almost universal for at least one member of a couple to take some parental leave when a child is born. Income splitting will significantly benefit a family where one person is taking some kind of parental leave. Most families won’t have a child this year, but most families will have at least one child at some point. Income splitting will thus benefit the vast majority of families at some point in their lives.
2. Beyond the first year of a child’s life, the period during which families need to think about full-time childcare is typically relatively limited – when a child is between 0 and 5 years old. After that, children usually spend most of their day in school. Assuming that a family has between 2 and 3 kids over a 5 year period, the period of time from the birth of their first to the entry into school of their last is about 10 years. ‘Most families’ are not at that stage – but for those that are, income splitting is a big help – whether they want to have a parent stay at home, reduce working hours, or opt for a lower paying job with more flexibility. I talk to a lot of families who are past the stage of having young kids at home, but who still support income splitting because they remember how hard those early years were financially.
3. Income splitting targets tax relief to families at the stage when they need it most. A single person or a couple with no children typically has more limited housing needs. When a couple starts having children, they face the cost pressures of paying off a mortgage on a family-sized home and buying the items required for their child. At the same time, they may have to contend with some reduction in income. This is not a good time to be forcing these families to also pay a higher rate of tax than others with the same household family income.
4. The Broadbent Institute’s numbers ignore the fact that income splitting opens up more options for families who might want to make a different choice. They assume that only current single-income families benefit; however, many dual income families might want to take advantage of income splitting and switch to a single income or a 1.5 income situation. These families certainly benefit from the enhanced choice they have under an income splitting model, and are no worse off for that choice than they are without it. It’s hard to know exactly how many families would want to make this switch, but a recent poll commissioned by the Institute for Marriage and Family Canada (http://www.imfcanada.org/sites/default/files/monthly_release/DaycareDesiresMay2013.pdf) reveals that 74% of dual income families believe that children are better off when one parent stays at home with their children (compared to 22% who believe their child is better off with a competent care giver, and 4% who say they don’t know). This suggests that many duel income families would rather have a parent at home, and are being pushed by economic factors to make a decision which they don’t believe is best for their family. Income splitting gives them more of an ability to make a different choice.
5. There are many different ways of implementing income splitting; and, the impact of the policy on different groups can depend on the model used. Income splitting can be implemented in a way that benefits different kinds of families. Groups like single parents can and should be included. Consider the example of a family where 1 parent works a traditional job making $60,000/year, and the other stays at home with the children. Under income splitting, each partner could claim an income of $30,000/year, and pay a relatively low rate of tax. Suppose then that the stay at home partner died suddenly. Without some modification, this family would see a sudden jump in their taxes as a result of the death of a loved one, and that clearly is not a good thing. An easy modification for single parents would be to allow them to split their income with one of their children or a dependent adult – and thus in this case to continue to record 2 incomes of $30,000/year as long as there are children to care for. This would be a simple and easy modification to income splitting which would ensure that a key segment of the population is not left out.
The charge from the NDP/Broadbent Institute that income splitting shouldn’t be implemented because it has different effects in different regions is totally absurd, and represents the worst kind of ‘blame Alberta’ political thinking. All federal programs will have different effects in different regions – seniors programs only benefit seniors, and disproportionately benefit regions with more seniors. Farm support programs only benefit farmers, and have a disproportionate impact in regions with lots of farmers. And similarly, the benefits of measures like income splitting which benefit families (particularly young families) are more likely to be felt in parts of the country with younger populations. The test for a policy should be whether or not it is a good idea, not some regional-balance test which virtually no measure could pass anyways.
Income splitting will also make it easier for couples to have more children, if they wish to. Many young couples I talk to want to have more children, but face significant cost pressures. Having that next child can often be a very difficult financial decision. Income splitting will remove financial barriers from couples who want to have children earlier, and higher birthrates will make it easier for us to support pension and other elder-care programs over the long term. (Our ability to pay for programs for the elderly requires a large enough number of people in the work force relative to those who are retiring. Making it easier for people to afford to have and raise kids helps to shift that ratio).
One question I get from time to time is ‘how will the government pay for income splitting’. Cost estimates for income splitting range, but none of them exceed $3 billion, which is about half of the projected surplus for next year. The resources are certainly available.
And finally, people sometimes ask me if income splitting has worked in other places. Income splitting exists in some form in France, Germany, Belgium, the United States, Luxembourg, Switzerland, Ireland, Norway, Poland, Spain, and many other places. Many other countries have decided that a fair tax system has to take family situation into account.
To summarize, income splitting is fair, will provide a benefit to most families, and provide additional benefits to society. If elected, I will advocate strongly for it.