October 4, 2011 – A federal proposal to allow income splitting for two-parent families would create more inequalities in the tax system rather than less, and it is a flawed idea, according to a report released today by the C.D. Howe Institute. In Income Splitting for Two-Parent Families: Who Gains, Who Doesn’t, and at What Cost? Alexandre Laurin and eminent tax scholar Jonathan Rhys Kesselman assess the economic impacts of the proposed tax change and find it would create some winners and far more losers rather than promote equitable treatment of families.
In the 2011 federal election, the Conservative Party’s platform contained a pledge to allow couples with minor children to split up to $50,000 of their incomes each year for tax purposes – contingent on a return to budgetary balance. Family tax relief would arise to the extent that the spouses’ marginal tax rates differ. Advocates of splitting claim an inequity in tax burdens for one-earner couples versus two-earner couples with the same total income, and they often invoke the image of the traditional family with mom at home minding the kids. The authors’ impact analysis of the income splitting proposal includes the effects if the provinces adopted a similar scheme. Among their findings:
- Income splitting would reverse the relative position of one-earner and two-earner couples with the same money incomes; on average, the two-earner couples would now bear the heavier tax burdens.
- The gains would be highly concentrated among high-income, one-earner couples: 40 percent of total benefits would go to families with incomes above $125,000, and the maximum annual gain from federal splitting would exceed $6,400. The maximum gains from provincial splitting would range from zero in Alberta to $5,750 in Ontario.
- Eighty-five percent of all households including single parents would gain nothing, and even among couples with children nearly half would gain nothing or less than $500. Because of the scheme’s large revenue cost, households that gain little or nothing would ultimately be losers on account of offsetting tax hikes or public service cuts.
- The annual revenue cost of the splitting proposal would be $2.7 billion for the federal government and an additional $1.7 billion for the provinces if they were to follow suit.
- Extending splitting to all couples regardless of children would more than double the revenue cost – to $5.6 billion for the federal treasury and $3.5 billion for all the provincial governments (with $2.1 billion for Ontario alone), yielding a total annual cost exceeding $9 billion.
- The splitting proposal would significantly raise marginal effective tax rates for most lower-earning spouses, thus imposing barriers for working or returning to work; this would make married women more vulnerable by reducing their work experience.
The authors conclude that income splitting would fail to achieve its ostensible horizontal equity goal. And if the objective is to provide support to families in raising children, it would distribute most benefits where they are least likely to be needed. Splitting would also be revenue costly, adverse to work incentives, and gender-biased. The authors suggest changes to other parts of the tax and transfer systems that would be more effective in addressing the true needs of families and taxpayers more generally while avoiding the disadvantages of splitting.
For more information contact:
Alexandre Laurin, Associate Director of Research, C.D. Howe Institute;
Jonathan Rhys Kesselman, Canada Research Chair in Public Finance and professor, School of Public Policy, Simon Fraser University;
Phone: 416-865-1904; email: firstname.lastname@example.org