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The proposal by the Conservative Party to allow income splitting (when the deficit is eliminated) has spawned much debate on the winners and losers of such a reform. On Economy Lab, we've seen Frances Wooley, Armine Yalnizyan, and Mike Moffatt weigh in against the Conservative proposal. While I share some reservations about the proposal with my Economy Lab colleagues, I think other aspects of the proposal deserve a fair hearing. In particular, solid arguments can be made that the family is the right unit for taxation.
In the 1960s, Kenneth Carter's Royal Commission on Taxation studied the question of the tax unit and determined that the family is the best basis for the income tax. There were two reasons listed in the landmark report. First, taxing individuals creates the opportunities for within-family 'tax arbitrage', meaning that people find accounting tricks to shift income from high income to low income family members. Second, Carter argued that "the family, as we find it in our modern society, continues to be the basic economic and financial entity." While the first point is certainly true and relevant, the second point seems to be at the crux of this week's debate.
One of the goals of income taxation is to -- gently or more forcefully, depending on your taste -- soften the inequalities generated by the market distribution of wellbeing. But does someone's wellbeing depend on their family situation? For example, if someone is earning $20,000 per year and living alone, is that person better or worse off than someone with the same income living with a spouse earning $100,000? It seems likely that the ability to share food, housing, and other costs renders the person with a high-earning spouse better off. These family circumstances push toward the argument that the family is the right unit to measure wellbeing. Ignoring one's family situation -- as strict individual taxation would do -- seems like we would be throwing away important information for assessing wellbeing.
A very prickly problem arises in applying the family principle, however. What's a family? Carter's definition clearly referenced the social environment of the era -- maybe in 2011 our society has changed. Among Canadians from Asian backgrounds, for example, elders are considered a core part of the family unit. Moreover, social acceptance of same-sex couples has certainly increased over the decades. Neither of these family types were embraced in the Carter Commission definition, but a great many Canadians would be quite offended to be told their family is not a 'family' by the Canada Revenue Agency. These problems of family definition exist in today's tax system, but the definition would cut deeper if thousands of dollars of further tax savings were on the line, as would be the case under income splitting.
Today's tax system already includes myriad measures that incorporate aspects of the family. From sharing of credits across spouses, to spousal RRSPs, to determining income for the refundable GST credit, family situation matters a lot for determining one's tax burden already. So, we shouldn't over-emphasize the extremes of strict family or strict individual taxation in this debate. The right question is whether a further push toward family taxation is worthwhile, or whether the current consideration of families in the tax system is sufficient.
Kevin Milligan is Associate Professor of Economics at the University of British Columbia
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