Category: poverty

How income splitting boosts income inequality

  • Update: As of February 12, 2014, the Conservatives have backed away from income splitting, suggesting it “needs a long, hard, analytical look to see who it affects and to what degree.”
  • Update #2: The Conservatives finally tabled a “scaled-down” version of income splitting on October 30, 2014. The new bill caps tax savings at $2,000, and will be supplemented with an increase in the universal child care benefit (the first payments of which will be made retroactively just in time for the 2015 federal election).

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There’s this thing we like to talk about. It’s called the Hard-Working Canadian. They’re a very special breed of Canadian, one that doesn’t really exist outside of statistics and policy justification. It’s more of a concept, really, though it’s treated as flesh and blood.

Back in March 2011, Prime Minister Harper made the Conservative’s first campaign promise for the coming May election. They had a new scheme to reduce the tax burden on Hard-Working Canadians, called income splitting. “We understand that family budgets are stretched,” Harper said at the time, “and by making the tax system fairer for families, we will make it easier for parents to cover the day-to-day cost of raising their kids.”

In a nutshell, income splitting allows parents with children under 18 to split up to $50,000 of their income in order to artificially bump their income-level down to a lower tax bracket.

It’s a rather lovely idea, actually: giving a tax break to families raising kids, and making it easier for one of the parents to drop out of the workforce, if they so choose, to raise the kids. It’s fantastic for families with two income earners, with one in a higher tax bracket, and it gets even better when one parent leaves the workforce. Not everyone can afford to do this, of course, but for those who can, it’s great.

Ok, that’s the middle class. Now let’s examine the equivalent tax-relief policy for other families, those to whom income splitting won’t apply: parents already in the lowest tax bracket, and single-parent families.

Ah, now this is where things start getting interesting.

You see, there is no equivalent tax relief coming for lower-income and single-parent families. Tax relief for higher-income families is the beginning and the end of the new policy. That’s all she wrote (well, that’s all Finance Minister Flaherty wrote, anyway).

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Talk of income splitting is back in the news because the Conservative government is releasing their budget on Tuesday (February 11), and is expected to reach, or come very close, to a balanced budget—the Conservative’s self-imposed prerequisite for bringing in income splitting. The Canadian Centre for Policy Alternatives (CCPA) released a critical report on income splitting just two weeks ago, on January 28, likely in anticipation of the government launching the policy.

Critics of income splitting argue that it doesn’t work for the families most in need of tax relief. The problem with this argument, however, is the assumption that the policy was designed with all Canadians in mind, including lower-income families. Clearly that wasn’t the case.

So who was it designed for? Was it designed for Hard-Working Canadians, the HWCs? It looks that way on the surface: even though HWCs are statistical, they’re also cultural: among other things they are assumed to be fiscally conservative, middle-class, and from traditional families.

And they are treated as the majority. So when you find out that 86% of Canadian families would not receive any benefit whatsoever from income splitting—a policy supposedly designed with those hard-working, fiscally conservative, middle-class families in mind—you know something went wrong.

The CCPA report (which came up with the 86%) points out that under income splitting, the bottom 60% of families would receive an average of $50, while the top 5% would receive an average of $1,100, with one in ten receiving more than $5,000. This top 5% would receive more than the bottom 60% combined, the majority of whom wouldn’t receive any benefit at all.

It turns out the real beneficiary of income splitting is not the middle class, but rather the wealthiest of Canadian families. Meanwhile, the poorest families get pennies, if any pennies at all. This, apparently, is what Harper meant by “making the tax system fairer.”

The result will be increased income inequality: the well-off becoming wealthier, and the low-income becoming poorer. And the average—the Hard-Working Canadian—becoming an increasingly meaningless statistic.

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