# CD Howe: Why Income Splitting for Two-Parent Families Does More Harm than Good



## andrewf (Mar 1, 2010)

_Here is a presser I received today... people may find it interesting._

*Why Income Splitting for Two-Parent Families Does More Harm than Good*: C.D. Howe Institute

Toronto, Oct.4 – A federal proposal to allow income splitting for two-parent families would create more inequalities in the tax system rather than less, and it is a flawed idea, according to a report released today by the C.D. Howe Institute. In Income Splitting for Two-Parent Families: Who Gains, Who Doesn’t, and at What Cost? Alexandre Laurin and eminent tax scholar Jonathan Rhys Kesselman assess the economic impacts of the proposed tax change and find it would create some winners and far more losers rather than promote equitable treatment of families.

In the 2011 federal election, the Conservative Party’s platform contained a pledge to allow couples with minor children to split up to $50,000 of their incomes each year for tax purposes – contingent on a return to budgetary balance. Family tax relief would arise to the extent that the spouses’ marginal tax rates differ. Advocates of splitting claim an inequity in tax burdens for one-earner couples versus two-earner couples with the same total income, and they often invoke the image of the traditional family with mom at home minding the kids. The authors’ impact analysis of the income splitting proposal includes the effects if the provinces adopted a similar scheme. Among their findings:

• Income splitting would reverse the relative position of one-earner and two-earner couples with the same money incomes; on average, the two-earner couples would now bear the heavier tax burdens.

• The gains would be highly concentrated among high-income, one-earner couples: 40 percent of total benefits would go to families with incomes above $125,000, and the maximum annual gain from federal splitting would exceed $6,400. The maximum gains from provincial splitting would range from zero in Alberta to $5,750 in Ontario.

• Eighty-five percent of all households including single parents would gain nothing, and even among couples with children nearly half would gain nothing or less than $500. Because of the scheme’s large revenue cost, households that gain little or nothing would ultimately be losers on account of offsetting tax hikes or public service cuts.

• The annual revenue cost of the splitting proposal would be $2.7 billion for the federal government and an additional $1.7 billion for the provinces if they were to follow suit.

• Extending splitting to all couples regardless of children would more than double the revenue cost – to $5.6 billion for the federal treasury and $3.5 billion for all the provincial governments (with $2.1 billion for Ontario alone), yielding a total annual cost exceeding $9 billion.

• The splitting proposal would significantly raise marginal effective tax rates for most lower-earning spouses, thus imposing barriers for working or returning to work; this would make married women more vulnerable by reducing their work experience.

The authors conclude that income splitting would fail to achieve its ostensible horizontal equity goal. And if the objective is to provide support to families in raising children, it would distribute most benefits where they are least likely to be needed. Splitting would also be revenue costly, adverse to work incentives, and gender-biased. The authors suggest changes to other parts of the tax and transfer systems that would be more effective in addressing the true needs of families and taxpayers more generally while avoiding the disadvantages of splitting.

For the study click here


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## CanadianCapitalist (Mar 31, 2009)

I haven't looked at the C.D.Howe study but I agree with its points. When the Tories proposed this, I thought it disproportionately favoured high-income, single earner households. One of the readers also commented that the proposal has the unintended consequence of decreasing labour market participation rates. I hadn't thought of that point and it makes a lot of sense.

http://www.canadiancapitalist.com/family-tax-cut-a-tax-cut-for-the-rich/

I for one hope that the family tax cut as currently proposed never gets implemented. With the economy looking the way it is, chances are the Feds won't be able to balance the budget before the next federal government and this proposal won't make it to parliament.


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## andrewf (Mar 1, 2010)

I said as much during the election. On the face of it, it was obviously terrible policy from just about any perspective, be it economic efficiency, fiscal sustainability or social equity.


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## Charlie (May 20, 2011)

I'm not in favour of the proposal because of its cost and added complexity.

But in my experience, high earners already have income splitting -- usually they earn through some sort of ownership structure -- partnerships, companies, etc -or have otherwise structured their affairs to tax plan. It's the $75K teacher, or $100 K salary guy who ends up paying significantly more tax then a two salary family -- they can't even pay their stay at home spouse childcare and have that deductible. But they can pay a stranger if both parents work outside the home. I seem to remember reading that Canada was the only G7 nation that didn't tax family income -- (could be wrong here...haven't google checked).

And the barrier to enter the workforce???? That's kind of the point. Removing the current barrier to having one parent stay home.


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## andrewf (Mar 1, 2010)

Single-income dual parent households already get the benefit of all the services/home production that the stay-at-home spouse can provide, tax free. The family with 1 spouse at $100k and another at $0k (and can provide child care, etc.) is better off than the one with two at $50 k (and need to pay for child care out of aftertax income). The latter family should pay less tax, as they are less wealthy, even though the total gross market income is the same for each. They don't get the benefit of a stay-at-home spouse. That's a luxury, not a right.


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## Charlie (May 20, 2011)

under the current system, the one income $100K family pays $9500 more tax then the two earner family with the same income. ($27,300 vs $17,800). That's a greater then 50% premium. Childcare -- subject to ridiculously low thresholds (IMO) -- is deductible for tax.

It's an anomaly that's unique to the Canadian tax system. But one that is too expensive to fix. The "rich" -- the doctors, accountants, lawyers, business owners, the self employed, and many other professionals are already splitting income. It's crazy that a $100K a year one salary family has to pay such a premium because their job structure does not allow the same games.

I think much of the CD Howe Report's discussion is misleading. Except the staggering cost -- which should be the deal breaker for this proposal.


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## andrewf (Mar 1, 2010)

Charlie said:


> under the current system, the one income $100K family pays $9500 more tax then the two earner family with the same income. ($27,300 vs $17,800). That's a greater then 50% premium. Childcare -- subject to ridiculously low thresholds (IMO) -- is deductible for tax.
> 
> It's an anomaly that's unique to the Canadian tax system. But one that is too expensive to fix. The "rich" -- the doctors, accountants, lawyers, business owners, the self employed, and many other professionals are already splitting income. It's crazy that a $100K a year one salary family has to pay such a premium because their job structure does not allow the same games.
> 
> I think much of the CD Howe Report's discussion is misleading. Except the staggering cost -- which should be the deal breaker for this proposal.


But that 100k and 0 family is better off. Realistically, they should be compared to a family with one earner at $100k and a second at $50k.

If the $100k and $0 family paid the same tax as the $50k and $50k family, then the former would get to have the stay at home mom cake and eat it to, which is hardly fair. It would put dual-income families at a disadvantage.


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## joncnca (Jul 12, 2009)

andrewf said:


> If the $100k and $0 family paid the same tax as the $50k and $50k family, then the former would get to have the stay at home mom cake and eat it to, which is hardly fair. It would put dual-income families at a disadvantage.


i'm not really getting into this discussion, but i wanted to comment on this statement about the "get to have the stay at home mom cake and eat it too".

this assumes that it's better to be a stay at home mom than to be working, which i simply cannot believe is uniformly true. i think many stay-at-home mom's may actually prefer to be working, than to be at home, because it's probably a hell of a lot easier to deal with unreasonable adults than unreasonable children. 

the parent feels an socialized obligation to take care of his/her child, but by no means should that be taken to mean that it is easier (and preferable) to be staying at home versus being at work.

i'm sure staying at home and listening to mind numbing children's songs over and over again, bored out of your mind that you barely have any interaction with other adults about anything other than your children, being 'at work' basically 24/7 because you can't leave your parenting at the office....this is certainly not "cake"

and when one spouse is so stressed by their kid, it probably affects the other spouse negatively as well, and puts a strain on the overall happiness of the household.

i understand that the stay-at-home parent allows the family to save on child care costs, but you're not accounting for the monetary value of this personal child care. a little sensitivity is warranted.


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## OhGreatGuru (May 24, 2009)

andrewf said:


> But that 100k and 0 family is better off. Realistically, they should be compared to a family with one earner at $100k and a second at $50k.
> 
> If the $100k and $0 family paid the same tax as the $50k and $50k family, then the former would get to have the stay at home mom cake and eat it to, which is hardly fair. It would put dual-income families at a disadvantage.


I beg to disagree. The stay-at home parent isn't burdening the rest of society with demands for subsidized day care, publicly funded universal JK; and publicly funded full-day Kindergarten. The stay-at-home parent doesn't get to deduct up to $7500/child for day care costs. All of our family law treats families as a single economic unit, but the income tax system does not. Because of the structure of our income tax the $100K single-earner family is being taxed at a much higher rate than the 2 x $50K two-income family, on the same gross family income.

With the cost of housing & taxes the average family can no longer afford to live on a single income. So both parents working has become a necessity, not a choice. This in turn means governments are being coerced into providing day care at public expense to everyone, instead of providing it where it is most needed.

PS. I think what really worries the CD Howe institute is that if he government brings in fairer taxation for the middle class, they will have to raise rates on the upper class to compensate.


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## andrewf (Mar 1, 2010)

joncnca said:


> i'm not really getting into this discussion, but i wanted to comment on this statement about the "get to have the stay at home mom cake and eat it too".
> 
> this assumes that it's better to be a stay at home mom than to be working, which i simply cannot believe is uniformly true. i think many stay-at-home mom's may actually prefer to be working, than to be at home, because it's probably a hell of a lot easier to deal with unreasonable adults than unreasonable children.
> 
> ...


My point is that the comparison people make is that in two families with a gross income of $100k, the ($100k,0) family pays more tax than the ($50k,$50k) family, and that this is unfair. My argument was simply that the former family gets not only that gross market income, but also the benefits of a stay-at-home spouse. I'm not saying it's fun to stay home and take care of kids or that it's better than working; I'm saying that it has a financial value in foregone childcare expenses and other home production (cooking, cleaning, house maintenance, yard work, etc.). These things have a financial value.

And this change, if anything, will increase the pressure on women to stay home even if they do not want to. Stay-at-home spouses in these families will face a very high tax rate when they consider going back to work (close to 50%), and even higher when the cost of childcare plus increased taxes is considered (well over 50%). This policy is pure barefoot-and-in-the-kitchen social engineering.





OhGreatGuru said:


> I beg to disagree. The stay-at home parent isn't burdening the rest of society with demands for subsidized day care, publicly funded universal JK; and publicly funded full-day Kindergarten. The stay-at-home parent doesn't get to deduct up to $7500/child for day care costs. All of our family law treats families as a single economic unit, but the income tax system does not. Because of the structure of our income tax the $100K single-earner family is being taxed at a much higher rate than the 2 x $50K two-income family, on the same gross family income.


No, but the working parent is paying tax, whereas the stay-at-home spouse is generating tax-free services for the family. The real comparison should not be between ($100k,0) and ($50k,$50k), it is between ($100k,$50k) and ($100k,0). In this case, the two-income family is paying more tax, which is fair. The ($100k,0) to ($50k,$50k) comparison is faulty (apples and orange). It is not realistically a choice that families can make. If one parent stays home, it generally does not allow the other parent to double their income.



> With the cost of housing & taxes the average family can no longer afford to live on a single income. So both parents working has become a necessity, not a choice. This in turn means governments are being coerced into providing day care at public expense to everyone, instead of providing it where it is most needed.


This change will do virtually nothing to help lower-income families. So this policy is paying wealthy families to have one spouse stay at home.



> PS. I think what really worries the CD Howe institute is that if he government brings in fairer taxation for the middle class, they will have to raise rates on the upper class to compensate.


The middle class does not appreciably benefit from this policy. As CC showed on his blog, the vast majority of the benefits of this policy accrue to families that are much wealthier than the median. What worries me is that you think average families have a spouse that earns well over $100k, a prerequisite to gain substantial benefits from this policy.


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## MoneyGal (Apr 24, 2009)

One of the tenets of Canadian tax policy is horizontal equity, which means having people in like circumstances be treated (relatively) equally by the tax system. 

While a family with one $100K earner and one non-earner pays more in tax than a family with two $50K earners, their circumstances are not that similar. If we look at disposable income, the two-earner family has childcare costs (probably in excess of the deductible limits). Their disposable income is not, in fact, higher than that of the $100K family and it is not an equity issue to equalize the tax payable by both families. 

AndrewF's posts on this point are excellent IMO; and I'm in a family that woud benefit from income-splitting. (Or at least I would have until recently; I suppose I should revisit those assumptions.)


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## Charlie (May 20, 2011)

Taking a different tack....why should a 70/30 100K two income family pay $1000 more tax then a 50/50 100K family? A 90/30 120K family pays $2700 more the a 60/60 120K family. Are their costs any less? And why should those with ownership structures pay less then both for the same family incomes? Where's the horizontal equity in that?

The costs of employment should be addressed through reasonable employment credits and child care deduction limits. We currently have both -- but at too low levels according to many. Me included. Family income is used to support the family. It should be taxed such. As it is in most countries.

I do find it crazy how much Canadian tax planning is focused on often artificial means to split income. Higher earners have typically addressed this. While I don't think its anywhere close to being the most pressing economic or tax issue facing us today -- I do recognize it as quirk of our tax system beyond the rhetoric that somehow you must be rich to choose to live on one income.


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## andrewf (Mar 1, 2010)

^ The only way to resolve that would be to raise rates overall and add these credits (assuming revenue neutrality). That raises some other equity issues for families without young children.

I think I'd rather see this take the form of an increase in the Canada Child Tax Benefit. This policy is very expensive and disproportionately helps wealthy families.


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## Square Root (Jan 30, 2010)

Tend to agree with Andrew. I guess your argument also suggests the pension sharing provisions are unfair? I would also agree that wealthier people with investments can easily get around this issue through spousal loans. The total benefit of all low rate income brackets is around $15k per year depending on the province. Most of this is captured under $50-60k, so it can be pretty significant for middle income earners.


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## smihaila (Apr 6, 2009)

joncnca said:


> i'm not really getting into this discussion, but i wanted to comment on this statement about the "get to have the stay at home mom cake and eat it too".
> 
> this assumes that it's better to be a stay at home mom than to be working, which i simply cannot believe is uniformly true. i think many stay-at-home mom's may actually prefer to be working, than to be at home, because it's probably a hell of a lot easier to deal with unreasonable adults than unreasonable children.
> 
> ...


Very well said, joncnca. It's in no way a "progress" for the wife at all. She won't have any opportunity to put in practice what she studied at the University, and the children may make funny observations when they grow up (maybe unintended but painful anyway) - it's very frustrating, I can feel that from my wife. You may say though that she would be isolated from the day-to-day stress and rat race, but taking care of the kids is also a stress of its own (I tried to take her role in a few situations and then I understood how hard that can be).


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## doc987 (Nov 23, 2011)

andrewf said:


> Single-income dual parent households already get the benefit of all the services/home production that the stay-at-home spouse can provide, tax free. The family with 1 spouse at $100k and another at $0k (and can provide child care, etc.) is better off than the one with two at $50 k (and need to pay for child care out of aftertax income). The latter family should pay less tax, as they are less wealthy, even though the total gross market income is the same for each. They don't get the benefit of a stay-at-home spouse. That's a luxury, not a right.


How on earth is the family earning 100k/single earner wealthier than the dual income family earning 50k each? Your statement makes no sense since the dual income family has a higher net (after tax) income rendering them the wealthier family. 
The goverment revenue losses for this type of income splitting are very significant. However, sometimes revenue losses shouldn't dictate what is considered fair and reasonable. Correct me if i'm wrong but are there not some goverment benefits which are determined based on total family income? Seems like the government favours combining family income only when it results in decreased benenfit payouts but doesn't combine family income when it results in decreased tax revenue!


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## smihaila (Apr 6, 2009)

doc987 said:


> How on earth is the family earning 100k/single earner wealthier than the dual income family earning 50k each? Your statement makes no sense since the dual income family has a higher net (after tax) income rendering them the wealthier family.
> The goverment revenue losses for this type of income splitting are very significant. However, sometimes revenue losses shouldn't dictate what is considered fair and reasonable. Correct me if i'm wrong but are there not some goverment benefits which are determined based on total family income? Seems like the government favours combining family income only when it results in decreased benenfit payouts but doesn't combine family income when it results in decreased tax revenue!


I couldn't agree more with what you just said.


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## andrewf (Mar 1, 2010)

Doc, the family with one spouse that can stay home gets the benefit of all that spouse can do while at home, such as providing child care, etc. That has a significant monetary value that often outweighs any difference in taxation.


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## smihaila (Apr 6, 2009)

What about the loss of one income in the family and the wife no longer being career integrated? This is a very major drawback imho.


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## doc987 (Nov 23, 2011)

andrewf said:


> Doc, the family with one spouse that can stay home gets the benefit of all that spouse can do while at home, such as providing child care, etc. That has a significant monetary value that often outweighs any difference in taxation.


We may have different definitions of wealth and fair taxation. I define wealth by a strict objective measure consisting of assets minus liabilities (net worth). The fact that there may be some other subjective "quality of life" metric such as child care, housework, etc. is irrelevant when measuring fiscal wealth and therefore should never enter the realm of designing fair (across the spectrum) tax policy.
As far as the "significant monetary value" you speak of...why not just equalize taxes across the board for all families and let them decide what to do with the "tax savings"?


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## andrewf (Mar 1, 2010)

I am using wealth to describe the level of current consumption that could be supported by income/home production. Home production is not irrelevant. It contributes to the consumption potential of the family. One parent providing child care is providing a monetary benefit through foregone child care costs, which can be substantial.

Let's be clear. The family with $100k and stay-at-home is not picking between that scenario and both spouses working and earning $50k each. They are picking between 100k,0k and say, 100k,50k. So the 50k,50k family is not their 'peer' for tax comparison purposes. And you cannot expect the 50k,50k family to be able to 'choose' to become a 100k,0k family. It's not that easy to double your income.


This whole discussion is moot for now, anyway. The government has already announced that they will not implement this policy during this mandate as they will not balance the budget.


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