Tories will never cut income tax rates

NationalPost.com – opinion
Mar. 31, 2011.   Terence Corcoran, Special To The National Post

This page will not spend the next four weeks chasing down the daily policy inanities announced by party leaders in their snake-oil campaigns to win voter support. In announcing a plan to control credit card interest rates, Jack Layton demonstrated once again why the NDP will never become an adult party. Michael Ignatieff’s pension reforms, announced Wednesday, confirm what we already know: The Liberals will do what the Conservatives have been doing, only more of it.

But some policy announcements merit a closer look. On Monday, his campaign apparatus set up around the back porch of a typical American sit-com middle-class family home in Saanich, B.C., Conservative leader Stephen Harper laid out sketchy details of his “family tax cut.” If Ottawa’s books are balanced by 2015, Mr. Harper said, a Conservative government will allow parents to pool up to $50,000 of their incomes for tax purposes so as to lower their family’s taxes.

Oh, what a long way the old Reform/Alliance/Conservative train has come. Once supporters of flat or flatter tax rates, the New Conservatives are on track for a hodgepodge income tax regime that includes all forms of personal income taxation at rates that will remain forever high.

Under Mr. Harper’s family tax cut, if one parent earns $100,000 and the other does not work, $50,000 in income from the working parent could be transferred to the non-working parent, where it would get taxed at a lower marginal tax rate. Or if one parent earns $60,000 and the other $20,000, some income could be transferred to the lower-earning parent to take advantage of lower tax rates at the lower level.

The reason for doing this is the long-held social conservative belief that the current system is “unfair.” It penalizes single-earner couples with children where one spouse, the wife in 99% of cases, stays home. A husband who earns $70,000 a year whose wife does not work will pay $8,695 in taxes. But if both parents earn $35,000 a year each, they would pay total taxes of $6,703, or almost $2,000 less.

Is this unfair? The idea that taxing individual incomes in family situations is unfair runs through the recent history of the Conservative party, through the old Alliance and Reform versions. Families with stay-at-home moms are being penalized, they say. The Conservatives say their new plan will “end the unfairness against single-income families with children” and “ends the current tax unfairness for many families.”

The annual cost of the family tax cut was estimated at $2.5-billion. But is that fair? The Conservatives would cut the taxes of only certain families, and shift only up to $50,000, and only if they have children under the age of 18. A single Ontario woman earning $100,000 a year will continue to pay a 43% marginal rate and 27% average rate, while a couple with children could split into two $50,000 incomes and pay a marginal tax rate of 31% and an average of 18%. That’s fair?

By calling this a “family tax cut,” and playing it as a matter of tax fairness, the Conservatives have man-aged to gloss over the shabby contradictions it introduces into Canadian tax policy. The Tory announcement said that the United States, France and other countries allow some form of income splitting. They do, but that’s not saying much about taxation or fairness.

France has a full-blown family tax regime, in which the incomes of both spouses are blended at a tax rate that is based on a formula that includes the number of children. But so what? France has one of the highest marginal tax rates in the world, and a notoriously dysfunctional tax burden that distorts behaviour and incentives. The U.S. income-splitting regime isn’t exactly revered for its soundness, in part because it clearly discriminates against single earners or anyone not part of a married couple. Nor are children a requirement to be part of the U.S. splitting regime.

The idea of taxing families rather than individuals is a fine theoretical idea, one supported by Financial Post contributor Jack Mintz. But even Mr. Mintz would admit (I think) that a regime based on family taxation is a model that has not been thought out for Canada. Either we have family taxation or we do not. Since we do not, the Conservative income-splitting scheme is a hybrid -a cat’s nose attached to a dog’s head.

The Harper family tax cut, based on the debatable tax policy ideal of taxing families instead of individuals, is a misguided income-splitting scheme that demonstrates once again that the Conservatives will never, ever get around to cutting personal income tax rates. The cost of the family tax cut will come at the expense of across-the-board income tax cuts for other Canadians. To pay for the family cut, other Canadians will have to continue to pay marginal tax rates that are too high.

The family tax cut, in some ways, is just another tax expenditure, a special tax treatment aimed at fulfilling some social-policy objective. The major beneficiaries are likely to be higherincome single-earner couples with children. Everybody else is out of luck.

Targeted tax benefits and credits are not, as the Conservatives seem to believe, tax cuts. The government claims to have “consistently lowered taxes on Canadian families.” In fact, these tax credits are the equivalent of new spending to be paid by all taxpayers. The Tory list includes the child care benefit ($750-million annually); the child tax credit ($1.4-billion); the children’s fitness tax credit ($100-million); the children’s arts tax credit ($100-million); the first-time home buyers’ tax credit ($150-million). There are many more.

With the family tax cut, the Conservatives have announced that the first thing they will do with at least $2.5-billion in surplus money in 2015 is spend it.

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