A splitting tax headache

NationalPost.com – FP/FP Comment
February 25, 2014.   William Watson

If Tories drop income splitting, they need a better reason than the Liberal-technocratic one

The buzz is that the government may backtrack on its promise to introduce income-splitting once it has balanced the budget. A columnist should never make the following admission, but I don’t actually have strong views about splitting. Perhaps the Marxists are right after all and my indifference is because my wife and are in the same tax bracket so if she moves income to me or vice versa, nothing happens. We pay the same marginal rate no matter what.

It does make a difference, however, if one spouse is in a higher tax bracket than the other. Then shifting reduces the tax on the income shifted. The Conservatives were talking about allowing up to $50,000 a year to be shifted. For some couples that could bring a big tax break.

It has been widely noted and almost equally widely condemned that allowing splitting would disproportionately benefit upper-income couples.

Well, duh, of course it would! People who pay little or no tax aren’t hit by the unfairness of the tax system; people who pay a disproportionate share of taxes are, disproportionately. The condemners evidently believe treating upper-income people unfairly is only fair. Nice value set, comrades.

The unfairness in question is for “traditional” couples, i.e., in which one partner works only part-time or not at all so that the family’s whole income is mainly earned by the working partner, who likely faces a higher marginal rate and therefore pays more tax than if the identical income were split evenly between partners. (Of course, in this construction “traditional” couples can be gay or lesbian or any combination of predilections the tax law recognizes, just so long as one partner doesn’t work in the paid labour market.)

Feminists respond to this unfairness argument with “Unfair yourself!”

They argue that non-working partners earn lots of non-market “income” by doing their own washing, cleaning, cooking, child-caring and so on that non-traditional couples have to buy in the market, with taxable income earned in the market. Because “income” generated in the home is not taxed, traditional couples get a tax break non-traditional couples don’t.

Working through the details of which family structures gain how much from which offsetting unfairness in the tax system will mainly give you a headache.

If the Tories do decide not to spend a couple of billion dollars establishing what most of their supporters do think of as fairness in the tax system, they need to come up with a better rationale than the one they’ve floated so far, which is the Liberal-technocratic one that in today’s labour market the skill shortage is so acute we mustn’t do anything that encourages skilled workers to withdraw—not even, though they obviously don’t say this, for the very important purpose of raising their children.

If splitting increases a non-working partner’s income to $50,000, then he or she — still mainly she, though more and more he — faces a higher tax rate at the margin. If she (let’s say “she”) earns any extra income on her own it’s taxed at that higher rate. That can be very discouraging. Netting only a little over 50 cents on the dollar once payroll and provincial income taxes are applied may not make up for all the useful things to do at home.

To the Tories, it seems, not doing market work is now almost unpatriotic.

Don’t we know there’s a skill shortage (supposedly) and a productivity crisis (supposedly) and that, like our Olympic athletes, we all need to put our shoulder to the wheel for the Motherland?

Well, that may be how they do things in Putin’s Russia, where the leadership regards every Russian as one of Putin’s workers. But it’s not how we do things here. We’re not all Harper’s, or Flaherty’s, workers.

How we do things here is that we establish a fair tax system that raises the revenues we need to pay for basic services—not the various “micro-aggressions” modern governments love to inflict on us. And then we let people make their own decisions about the relative worth of making an extra dollar of market income versus tending to their own or their family’s needs. In particular, we don’t have a policy that says, even implicitly, a woman’s place is in the labour market combating the skill shortage.

The one bright sign in the government’s contortions on income-splitting is that their argument hinges on the discouraging effect of high marginal tax rates on labour force participation. That is a very real problem, not just for non-working partners but for all of us.

If the Tories decide to put the $2 billion toward reducing marginal tax rates—or raising the incomes at which they kick in—well, $2 billion won’t go very far in that effort. But it will be a start.  And it will be conservative.

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