The Green Party has just released its election platform.
It promises two kinds of help for married couples and families.
The first is to "Lower income taxes and introduce full income splitting to reduce the tax burden on married couples and families."
The second is to "Share the load. More people working fewer hours. For those who want to, make it easier to telecommute or work from home. Share jobs. Flex hours."
The first promise - income splitting – conflicts with the second – sharing the load.
With Canada's current, individually based tax system, married couples have an incentive to divide home and work responsibilities. The more a person earns, the higher his or her marginal tax rate. So, from a tax point of view, it makes more sense for the second earner to take a part-time job than for the first earner to work overtime.
Income splitting, however, encourages a traditional division of labour, where one spouse maximizes his or her earnings potential by working long hours, and the other assumes full responsibility for home life. Income splitting means that the primary wage earner working overtime is the best choice, if that's what maximizes the household's income.
Having more people working fewer hours is a laudable goal. But income splitting makes that goal harder to achieve.
Background:
Income splitting advocates often ask; why should the tax system interfere with my choices about how to raise my children? As the Green Party platform says: "Support for those who stay home to raise their children and support for those who need to get back to work while their kids are still young."
Any kind of tax system will distort people's choices. The only question is: which choices are being distorted, and how much? Studies of full income splitting put the cost at between $4-billion and $5-billion in federal revenue alone, or about 3 per cent of federal income tax revenue. The Green Party platform also costs income splitting at $5-billion.
The revenue loss from income splitting could be made up by increasing everybody's income taxes by about 3 per cent. But that would reduce the financial incentive to take a job (or report income). Work decisions are distorted.
Or we could do what the U.S. does -- make up the revenue loss from income splitting by taxing couples at a higher rate than singles. Instead of increasing all taxes by 3 per cent, taxes on marrieds would increase by, say, 5 per cent. But this creates a marriage tax. Two singles could see their tax burden rise when they marry. Marriage decisions are distorted.
The Green Party promises to make up the revenue loss from income splitting through carbon taxes and other kinds of environmental taxes. Carbon taxes distort people's choices by causing them to consume less -- which is a good thing, from an environmental point of view.
However income splitting benefits couples at the middle and top end of the income distribution (the opportunity to income split is worth nothing unless at least one person in the family has a taxable income above $40,000, and the greater the income, the greater the potential benefits).
The burden of environmental taxes falls on those who spend relatively more of their income on carbon-intensive goods such as heating or transportation -- often moderate or low income families. Financing income splitting through environmental taxes transfers money from low and moderate income people to middle and higher income couples.
It's simple to support families with children: give money to families with children. Creating a more universal child benefit system that delivered real benefits to middle-class families would be a good place to start.
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