Turning elitist proposals into populist ones

Posted on June 13, 2011 in Equality Debates

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TheGlobeandMail.com – news/commentary/opinion
Published Monday, Jun. 13, 2011.   Rhys Kesselman

In five years as a minority government, the Conservatives introduced tax changes of broad benefit to the general public: two cuts to the GST, various tax credits, the tax-free savings account. Now, with a majority in hand, they have promised two major tax reforms that will turn them from populists to elitists.

Once the federal budget is balanced, the Conservatives plan to double the TFSA’s annual allowance to $10,000 and to permit income splitting for couples with children under 18. These are costly schemes, each running ultimately to billions a year.

While these proposals may appear to have wide appeal, most Canadians would gain nothing from them. The tax savings would flow disproportionately to the highest earners. Moreover, the ostensible goals of these proposals would be much better achieved by major changes to their structures.

Consider the proposed doubling of the TFSA annual limit from its current $5,000 level. Low and moderate earners typically can’t save even this amount, so any increase is worthless to them. For most middle-income earners, the tax savings from contributing to RRSPs trump those of the TFSA, and very few are using all of their allowable RRSP limits. Thus, few middle earners will gain from expanding the TFSA.

Only among the highest earners, above $125,000, are the full RRSP limits often used, so this group would be the primary beneficiaries from expanded TFSA access. And for this group, most of the additional TFSA room would be used simply to shield existing taxable assets with little inducement for new saving.

In specific circumstances, an expanded TFSA limit would help to improve savings incentives and fairness among taxpayers. Some early-career workers might wish to save initially with TFSAs and later shift those funds into RRSPs when their earnings and tax bracket rise. And some older workers and retirees might wish to use TFSAs for new savings or for mandatory withdrawals from Registered Retirement Income Funds.

The remedy for TFSAs to deal with these situations is not an increase in the general limit but, rather, giving all workers an option to trade off more TFSA room for reduced RRSP room. Older persons could also be granted higher TFSA limits, reflecting their limited years to contribute since the scheme was initiated in 2009 and less lifetime access than younger workers.

Now consider the proposal to allow income splitting by couples with children. One motivation might be the view that couples with the same total earnings should pay the same total tax. But this ignores the fact that a one-earner couple has more effective income (in the form of home-produced, untaxed services) than a two-earner couple with the same earnings. Moreover, this reason would not justify confining splitting to couples with kids.

A more plausible motivation for allowing income splitting but restricting it to couples with children is the desire to give parents the option to spend more time rearing their children. High-earning parents already have this opportunity. Yet, the government’s proposal for income splitting would be of no benefit to couples where neither spouse earns above the bottom tax bracket of $41,500, partners with higher earnings but in the same tax bracket, and single parents. In fact, the largest beneficiaries would be couples with one very high earner – those in least need of aid.

One way to achieve the intended goal of income splitting would be to enhance the National Child Benefit payments for families (including single parents) with young children. Focusing the increase on preschool-aged children would channel the support where parental presence is most valuable for child development.

The Conservatives have genuine choices in how to structure these reforms. They could use their majority to shift policy in an elitist direction, or they could reaffirm their populist course by directing benefits to the greatest need and best effect.

Rhys Kesselman is Canada Research Chair in Public Finance and a professor at Simon Fraser University’s School of Public Policy

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