Ottawa giveth, and Ottawa taketh away. Judging by last month's reported $13.2-billion federal surplus, there's more taketh going on than giveth. No surprise there, but how much of this makes sense for Canadian families? And could a more logical tax system deliver the crucial middle-class vote in the next election?
The Income Tax Act is a mess from the point of view of families. Most social benefits are based on the income of the family as a unit. Whether you qualify for the Child Tax Benefit or the GST credit, for instance, depends on the sum of your income and that of your spouse. But when it comes time to pay taxes, families suddenly disappear. If there are two spouses in a family, both pay their taxes individually, with little account taken of their family situation. This can have a dramatic impact.
Consider two couples with identical total incomes. One has a working spouse earning $80,000 a year and one stay-at-home spouse. The other has two working spouses earning $40,000 each. Even ignoring the presence of children, the one-earner family will pay $3,000 more in taxes. Put a few children in the mix and the gap can grow to as much as $5,000, depending on day care and other expenses. This is clearly unfair. Families with identical incomes should face identical tax bills.
The culprit is our progressive tax structure, since the one-earner family faces a much higher marginal tax rate. Outside of introducing a flat tax, the best solution would be to allow spouses to file jointly and thus split their income for tax purposes. Joint filing is standard practice in many countries, including the United States, France and Germany.
This concept of income-splitting has been kicked around for decades in Canada. The 1966 Royal Commission on Taxation declared that the family should be considered the “basic economic unit in society” and the focus of Ottawa's tax efforts. It was politely ignored. In 1998, the C. D. Howe Institute again considered the topic, listing the equity advantages as well as the logic of having both the “give” and “take” sides of the tax system operating in concert. The report noted that income-splitting would be of the greatest benefit to low- and middle-income families, since most high-income families already have two top-bracket earners. Bizarrely, the authors ultimately abandoned support for the notion because of feminist concerns that joint filing would force wives to reveal their full incomes to their husbands and threaten the “economic autonomy of married women.”
But if the academic world has given up on income-splitting, families have not. A surprising grassroots movement has recently latched on to the idea. And one of its most passionate advocates is Sara Landriault, a fireplug stay-at-home mom from Kemptville, Ont.
Just six months ago, Landriault was at home watching Scooby-Doo movies with her three children and complaining about the government. Today, she's speaking for a new lobby group called Care of the Child Coalition and buttonholing politicians across the country. In September, she appeared before the House of Commons Finance Committee to push the concept of joint tax-filing for families. “Right now, the government treats my family like we are a collection of individuals. Income-splitting is a recognition of the importance of the family unit,” she says. “People think I am against day care, but I'm not trying to turn this into a Mommy War. Allowing families to split their incomes will benefit every family regardless of your child-care choice, from poor to rich.”
Conservative MP Garth Turner is pushing the federal government to allow seniors to split pensions what might be considered the beachhead for the bigger issue of income-splitting for families. According to Library of Parliament calculations prepared for Turner, allowing families with children under 18 to split their incomes would cost the treasury $1.6 billion annually a fraction of the roughly $5 billion that cutting the GST cost. Significantly, two-thirds of the benefits from income-splitting will go to two-income families, with the biggest gains delivered to the $60,000 to $80,000 family-income bracket.
Income splitting is family friendly, neutral with respect to child care, targeted at the middle class and relatively inexpensive. If that isn't politically attractive, what is?