Income splitting was one of the policy proposals that the Conservatives ran on in the recent election. I think it’s a bad idea – a well-intentioned bad idea, but a bad idea nonetheless. But it’s also a policy that a lot of people I spoke with prior to the election had no idea was even being considered, so I think it’s also worthwhile to discuss it.
Income splitting is sometimes called “joint filing” (certainly it’s called that in the United States, one of the few countries to have it). It’s a fairly simple concept: if you’re married, you can take your income and your spouse’s income, add them together, and then each of you declares half of that total as your income on your tax return. Pretty straightforward.
The Tories pushed income splitting as being a “pro-family” policy, though, and I don’t think it qualifies. It’s certainly a tax policy that especially benefits a certain type of family – namely, your traditional two-parent single-income family, where the single earner making, say, $70,000 annually doesn’t pay taxes on a 70K salary, but instead effectively pays taxes on two salaries of 35K instead, which is a lot less tax in a progressive income tax system (about five thousand dollars less – a third of his tax bill). That’s a good deal for that family. It’s a lot less impressive for, say, a family earning 90K, divided between one earner making 60K and a second making 30K: their total tax burden goes from roughly $16K to roughly $15K. (It’s also a tax policy that benefits especially wealthy earners, not that this comes as a surprise: it’s essentially regressive.)
But what bothers me most is that a policy claimed as “pro-family” isn’t, not really, because income splitting is a policy that doesn’t have anything to do with raising a family: it has to do with marriage. Childless married couples get income splitting just like childrearing families do, and if there’s any reason for the government to promote marriage through tax policy, it is to create stable homes for children. Income splitting doesn’t do that: it just gives married people money. There are all sorts of policy options on the table for assisting families if you want to give them money that can do it in a more direct and equitable manner: baby bonuses, tax credits related to childrearing, paid parental leave, et cetera.
But the Tories didn’t push those: they pushed a policy that would only really help those families that, let’s be honest, Tories approve of, and they glibly suggested that it would help other families become more like traditional single-earner families (which it won’t, because the tax break can almost never compensate for the loss of a salary, even with the gains of having a full-time homemaker present). It’s a bad policy, and only the first of many the Conservatives will push through now that they have a majority.
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As someone who’s still learning the ins and outs of income splitting, this was a good take, and a simple one to start with.
That said, I don’t see the downside to it, save for the government getting less taxes. Of course a reduction in tax that’s the same across the board would benefit wealthier folks, but how is that a detriment to anyone else?
It may not benefit every definition of family, but if the best argument you can make against it is that it’s labelled incorrectly, that’s not much of one.
Joint filing in the US isn’t quite the way you describe it. The total income for the family — minus any legitimate business deductions — is then taxed at a rate for married couples; the income is not divided in half & then taxed twice. In that sense it is a corporate tax: The entity of the marriage is taxed, not the individuals in it.
It can get complicated, especially if a family has income from several different sources including wages/salaries, income from a privately owned sole proprietorship (say a home office), and income from a joint partnership and/or a corporation. Each business income has its own rights of deductions for legitimate expenses (if you have a home business, f’r instance, you may deduct car mileage only for those times when you use the vehicle to actually go to a meeting related to the business).
You know, I live in the US and file jointly with my wife, but never thought about it in those terms. They never really make it explicit that it’s income-splitting here and I began to correct you – until I thought about it and realized that’s effectively what it does.
It is a huge part of why the lack of nation-wide gay marriage is either a tremendous financial burden for gay couples, or else an unfair privilege for hetero couples. And since marriage implies sex, with adultery still illegal in some areas and at the very least a good way to win a divorce suit, the US is basically saying “Hey, commit to sleeping with one person and save on taxes!” Essentially the government is rewarding you monetarily for an “acceptable” sexual lifestyle (or punishing you for not having one, depending on whether you think joint-filing should be ended or expanded to same-sex and non-married, possibly non-sexual relationships).
Of course a reduction in tax that’s the same across the board would benefit wealthier folks, but how is that a detriment to anyone else?
Because the government has less money to support the less well off. It’s a reverse Robin Hood – take less from the rich, so there’s less to give to the poor.
Buzz: You’re right that it’s different in that we have separate rates, but it’s still effectively income-splitting because the total income is only taxed once. Effectively, both partners are only paying half of the total tax, instead of all of their own share.
@Chris:
“…the US is basically saying, ‘Hey, commit to sleeping with one person and save on taxes!'”
Or, in my case, marry an accountant and never have to fiddle with taxes ever again. Although, I suppose you could swing that kind of deal in Canada, too.
I do not think the proposal was well-intentioned. I think many people who support it are well-intentioned, but that the people who developed it intend to help upper middle class single wage earner families to the cost of all other families, including especially low income dual income families and single parent families, because they do not like the idea that Canada doesn’t look like tv families from the 50s. Though since gay marriage is (so far still) legal here, it doesn’t privilege straight people.
I’m not sure how this will work with the multitude of other things that are sort of under the banner of marriage — civil unions, common law unions, etc.
We apply income splitting in France, but you don’t have to be married to benefit from it, you only have to declare being a couple to court. Each child is taken into account by adding a half person (say a couple with a child would divide their income by 2.5, a couple with 4 children would divide their income by 4).
Of course we also have paid parental leave, baby bonuses and child support for everyone provided you have at least 2 children.
P.C. Benard: In France, are couples expected to be romantically involved? Or can you declare being a couple with pretty much anyone, for tax purposes?
Yes. This.
I am going to reap insane benefits from income splitting. I make $100K per year, my wife makes zero. I’m basically the ideal candidate. My marginal rate drops nearly ten points. I should save something like, what, $7K a year?
I so don’t need an extra $7K. I’m good, really. But that’s $7K that this ass-hat government won’t be collecting to offset its record-breaking 50 gigabucks deficit, won’t be using to fund the social programs and heath care and education that the public wants, won’t be using to support the science research my graduate students rely on to start their own careers.
Why in the world are these guys held up as the fiscally *responsible* party? They squandered a $12 billion surplus the first year in office, expanded the cost of government by 50%, left us no buffer to fall back on when the recession hit, and will wipe out all the benefits reaped of eleven sequential Chretien/Martin debt-reducing budgets.
And now it’s going to be four years of less taxes paid by the exact people and corporations who can so totally afford to pay taxes, at the exact time that we need to be supporting those most vulnerable and hammering the deficit back down again.
Ass-hats.
Maybe I’ll write them a letter, thanking them kindly for the $3500 donations to the NDP and Planned Parenthood.
What you don’t realize is how hopelessly married couples get fucked over on the benefit side. Two people, earning 30k a year, each receive various refundable credits on Property tax, GST, Prov. Sales (now moot) and other similar benefits. The year those people get married, not only do they lose those credits (Family Income = 60k) but also they have to pay back the portion that was calculated in advance. Now, understandably, this may be fair on a property tax/rental rebate credit, as two people are now sharing one property, but we still use the same amount of toilet paper and bubble gum — which are taxed.
If you are going to impose a tax penalty based on Total Family/Household Income, then it is only fair that the entire family income be considered as a single entity for tax purposes.
Now consider the Single Mom. She gets to include her oldest child as Equivalent to Spouse, netting the 10k spousal exemption rather than the 4k dependent exemption. She also, under an income splitting system would be allowed to cut here 35k income into two 17k incomes, and pay next to no tax. Single parents would benefit the most under this system.
As for the ultra rich? They might save a bit, but really not a whole lot. Someone earning 250k a year, splits it into two $125, would end up saving about $4000.
Baldguy, this is literally the first time I have seen anywhere that the Tories plan to allow children of single mothers as spousal equivalents for their “Family Tax Cut” plan (e.g. income splitting). Their platform explicitly stated that the FTC was only for married couples, and every costing I’ve seen of it addresses it in those terms. Can you point me to a cite that says otherwise?
I don’t know for sure that this would be allowed, but check out line 305. It allows you to treat a dependent as if they were a spouse.
… and Equivalent to Spouse is already in the tax code.
That’s for a specific tax credit, though, rather than being a general principle of taxation. Unless the FTC is similarly worded – and the Tories sure as hell didn’t say it would be – the presumption under existing tax law is that it won’t apply.
I’m confused — you seem to be saying that the income splitting plan is for any married couple, but everything I read about it says “with children” — childless married couples (including gay couples) get no income splitting.
Please note that what we call “joint filing” south of the border was introduced when significant employment among married females was quite rare. It was basically a way to get double the standard deduction and get a moderately beneficial tax table back when everybody wore hats, doctors were endorsing cigarette brands, and the main reason women went to college was to meet men with good prospects. I find it mildly disappointing that anybody in this day and age would consider introducing this system. It’s the tax code equivalent of girlfriends in the the refrigerator.
Australia also has income splitting, and it’s been around since one income earner per household was expected (if not actually reality). It applies to de facto spouses (including same-sex couples like my girlfriend and I, from 2009 onwards) as well as married spouses.
The sting, of course, comes when you’re on the aged pension and the couple rate is not double the single rate. I suppose for straight couples the benefit has accumulated over a lifetime, but for older gay couples who paid extra tax all their lives and now suddenly have to survive on a lesser pension, equality was a nasty surprise.
@Chris Lowrance: Nope, they don’t have to be romantically involved, they only have to live in the same house and not being siblings.