Income splitting: a poorly targeted non-commitment with negative labour market implications

I was on the CBC Early Edition this morning, discussing Stephen Harper’s first election promise: income splitting for families with children. If you missed it, you can listen to the podcast here (I’m at about 1:08:00 onwards). Since five minutes is too short for any kind of informed discussion, and I think that informed discussions are the building blocks of democracy, here’s my more detailed take on income splitting.

For a party that is campaigning on fiscal responsibility, income splitting for families with children under 18 is a rather irresponsible way of spending $2.5 billion.

Let’s be clear — this is not a policy that helps young families. This is a policy that helps a small minority of families — about 13% or 1 in 8 of all Canadian families with children. The Conservatives themselves estimated that income splitting would benefit 1.8 million families, which sounds like a lot until you look at the total number of families in Canada, which at last count was 14.1 million.

The kicker is that income splitting does not help the 1.8 million Canadian families that need it most — those who live in poverty or barely make ends meet slightly above the poverty line.

Income-splitting works by allowing families to allocate more of their earned income to a lower tax bracket by sharing the earned income between the spouses when filing taxes. Automatically, this means that the 2 million single-parent families in Canada will get no benefit from income splitting, as there’s no spouse to split the income with. Dual-earner families with spouses who earn equal incomes will also get nothing. Single-earner families with an earner whose taxable income falls in the bottom tax bracket (currently under $41,544) get nothing. And among families with a stay-at-home parent or a parent working part-time only, the higher the salary of the working parent, the higher the benefit.

The highest possible benefit — $6,408 — goes to the few families with a single earner whose taxable income falls at least $50,000 above the cut off of the top tax bracket (at the 2011 tax brackets, you’ll need taxable income of at least $178,800 to get the maximum benefit). Calculation details are here.

What we have here is a reverse Robin Hood situation, where the government would be giving more money to the people with the higher incomes. This is hardly a fiscally responsible way to spend taxpayers money.

While I’m sure that every single family with children, no matter what their income, can easily find a way to spend another $1,000 or even $6,408, we need to get smarter with our government spending and make sure that our limited resources go to the families which need the most support.

There are better ways to spend $2.5 billion to support young families. Increasing the per-child benefit amount of the Canada Child Tax Benefit would be my first choice, as this is an effective income-tested tax benefit for families with children that most Canadian families receive (currently up to family income of about $110,000).

But it won’t be your first choice if you wanted to subsidize families with a stay-at-home parent. In fact, if you asked tax experts to design tax policy to give women incentives to stay home with the kids, income splitting is what they’d come up with. This is family tax policy based on the outdated notion of the 1950s family where women stay home to take care of the kids while men go to work to support the family.

Conservatives claim that our tax system is unfair to stay-at-home parents, but we already provide plenty of incentives to keep women home. The high costs of child care make work pay a lot less for women, especially those with more than one child under 12. Add to this the extra transportation costs and other work expenses, and you have a significant barrier for women who want to go back to work after maternity leave.

A friend of mine, Mary, is a smart and well-educated software engineer with 7 years on the job before she decided to start a family. She went back to work for a year after her first child was born, then had a second one. Going back to work after her second mat leave, she calculated that her well-paid, full-time software engineering job is only netting her family about $470 extra per month after childcare and work-related expenses are paid. Needless to say, she quit. And that’s before any income splitting. Add income splitting to the mix, and her family would be netting another $200 per month more with her off work than if she was working (given her and her husband’s tax brackets).

While Mary can afford to stay home because her husband’s salary is high enough, and she enjoys taking care of the children, what do you think is happening with her software engineering skills? If she takes 5 or 10 years off work while her children are young and need childcare, do you think she’d just be able to walk into the same job when the kids grow up? That’s highly unlikely.

What expensive child care and tax incentives for stay-at-home moms (all the way to children’s 18th birthday) lead to is a tremendous erosion of job skills among women. With an aging labour force and looming skill shortages, the Canadian government should be looking for ways to tap women’s skills and potential in the workforce, not providing incentives for them to drop out of the workforce.

But Mary is not representative of the average Canadian family, because most Canadian families cannot live on one parent’s salary alone. Half of all two-parent Canadian families with children earn a combined income of $80,000. And that’s largely with both parents working.

For most families, there is no choice between earning $40,000 each or having one parent bring home $80,000 while the other one takes care of the kids. The choice is between earning $40,000 each or having one parent quit their job while the other continues to earn $40,000.

Statistics tell us that people with higher education and higher earning potential tend to find spouses with similarly high education levels and earning potential. So we really are talking about significant skill erosion here if income splitting is successful because the only families who can afford to take advantage of this tax subsidy offer are families of software engineers or other professionals.

In summary, the Conservatives are proposing a $2.5 billion subsidy to stay-at-home mothers, where the higher your husband’s income is, the more you get. A tax subsidy, which, if successful at incentivizing more mothers to quit their jobs will lead to a large-scale erosion of women’s labour force skills at a time when we need all hands on deck to keep our economy running.

Though clearly fiscally irresponsible and aimed at subsidizing an outdated notion of the family, I don’t think we should get too excited about this spending announcement, given that it’s not likely to come into effect during the 4-year term of the next elected government. This is clearly a non-commitment to support families as the earliest it could possibly be implemented is 2015/16 and that’s if deficit-reduction goes as planned. But in politics — and economic forecasting — 4 years is an awfully long time. Who knows what our top priorities would be then?

Canadians know what the Conservatives’ real priorities are — these are the ones that have actual dollars attached to them now. The list includes a new round of corporate income tax cuts that’s costing us $2.8 billion this year alone, fighter jets estimated to cost $29.6 billion, more prisons at who knows what cost. These were all deemed priority initiatives that are worth borrowing for.  Support for families, on the other hand? According to the Conservative Party, that’s not worth borrowing for.

Topics: Economy, Education, Employment & labour, Poverty, inequality & welfare, Taxes, Women