Income splitting to drain small number of people from labour force: PBO

OTTAWA – The Harper government’s controversial income-splitting tax plan will encourage a small number of Canadians — particularly women — to work less or stay out of the labour force altogether, the parliamentary budget office said Tuesday.

In a new report, the federal budget watchdog also found what other research of the government’s so-called “family tax cut” has shown: only 15 per cent of households can qualify for the credit and higher-income earners will reap the biggest gains.

But this latest examination of the policy, which was a key pledge in the Conservatives’ 2011 election platform, also predicted the measure will open up a “small” drain on the workforce — the equivalent of 7,000 net full-time jobs.

Income splitting provides incentive for the lower-earning partner in some households to stop working because of the tax savings, said the report by parliamentary budget officer Jean-Denis Frechette.

Since men are the primary breadwinners in 80 per cent of Canadian households, Frechette said he expects women to make up the majority of those who withdraw from the workforce.

The measure allows eligible taxpayers to transfer up to $50,000 of income to his or her spouse in a lower tax bracket in order to collect a non-refundable tax credit of up to $2,000 per year.

Prime Minister Stephen Harper introduced the multibillion-dollar measure last October, allowing it to come into effect in time for this spring’s tax season in this election year.

For years, the plan has been in the crosshairs of critics who say the policy provides no relief for 85 per cent of all households, while giving more benefits to higher-earning families.

The budget office report drew similar conclusions.

“It remains regressive if we’re saying that every family in Canada isn’t benefiting,” Frechette told reporters about the plan, which his office estimates will reduce government revenues by $2.2 billion this year.

The independent budget office was careful to say it neither rejects nor endorses the measure.

Politicians, however, wasted little time Tuesday weighing in on the report’s findings.

Employment Minister Pierre Poilievre issued a statement shortly after the study’s release, though he made no direct reference to specific elements presented by the budget office. Poilievre stressed that the Conservatives’ overall plan to lower taxes for families remained on the right track.

Opposition parties were equally swift to cast the report’s findings as further evidence the income-splitting plan should be ditched.

NDP finance critic Nathan Cullen called the measure “wasteful and ineffective.”

Liberal finance critic Scott Brison said a policy that costs $2.2 billion and hurts jobs and growth is “clearly wrong-headed.” Asked about how it might affect female workers, he added: “The Harper government is a bit of a throwback to Ward and June Cleaver.”

The report also found earners in the bottom 20 per cent of the income distribution have “near zero” eligibility for the tax credit. On the other hand, it said about 27 per cent of households in the country’s richest quintile are projected to qualify for income splitting.

Of the two million households eligible for income splitting, the report said 642,000 of them will hit the $2,000 hard ceiling on benefits.

The people who fail to qualify for returns include those who are single, who don’t have kids or don’t earn enough to pay income tax.

The office’s estimated cost of income splitting for 2015-16 — $2.2 billion — was higher than the government’s projection of $1.935 billion.

The measure also arrives at a time when the country is trying to attract lower-wage workers into the work force to deal with isolated labour shortages.

The budget office explained that secondary earners in qualifying households will have incentive to work less because taking on their spouse’s wages could move them to a higher tax bracket.

The study estimated the anticipated effect of lower-earning partners staying out of the workforce will reduce their participation in the labour supply by the equivalent of 14,000 full-time jobs.

The watchdog said this decline will likely be offset, in part, because the tax measure will also push primary income earners into a lower tax bracket, thus encouraging them to work more. The result of that change, the report predicted, will add the equivalent of 7,000 full-time jobs.

Frechette described the overall net effect as “marginal” because it represents less than 0.04 per cent of total hours of labour supplied in the country and less than one 0.01 per cent of employment income.

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