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The Globe and Mail

Big earners are biggest winners from income splitting

The federal Tories pledged to permit couples with children under 18 to split up to $50,000 for tax purposes, beginning after the federal budget is balanced. The Ontario Tory platform would go further: it would extend income splitting to all couples, with or without children, and not await budgetary balance.

DAVE CHAN/dave chan The Globe and Mail

Rhys Kesselman holds the Canada Research Chair in Public Finance with Simon Fraser University's School of Public Policy. Alexandre Laurin is Associate Director of Research with the C.D. Howe Institute. Their study, Income Splitting For Two-Parent Families: Who gains, Who doesn't, and at What cost? was released Tuesday.





Proposals for income splitting advanced by the federal Conservatives in their 2011 election campaign and the Ontario Conservatives in the current campaign are irremediably flawed yet have attracted almost no critical commentary -- even from the political opposition.



The federal Tories pledged to permit couples with children under 18 to split up to $50,000 for tax purposes, beginning after the federal budget is balanced. The Ontario Tory platform would go further: it would extend income splitting to all couples, with or without children, and not await budgetary balance.

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These proposals are not just small change in terms of fiscal cost. The federal proposal would cost an estimated $2.7-billion annually in foregone revenue, and the broader Ontario proposal would cost the provincial treasury $2.1-billion. If splitting were extended to all couples as proposed for Ontario, the federal cost would rise to $5.6-billion and another $3.5-billion for all provinces.

While income splitting has been touted as a benefit to all families, the federal proposal would disproportionately benefit high-income couples where one spouse earns much more than the other. If the objective was to provide support to families in raising children, this reform would target those least in need. Lower income single parents would gain nothing, and the biggest benefits would go to high-earner families who already have one parent at home.



Fully 40 per cent of total tax relief would go to families with children and incomes above $125,000, mostly couples where one partner earns a small share. Top earners would enjoy the maximum gain of $6,408 from federal splitting and an additional $5,748 in Ontario for a total annual tax cut exceeding $12,000.



In contrast, we estimate that 85 per cent of households would gain nothing (single persons, single parents, and under the federal scheme couples with no or only grown children). Even among families with children, nearly half would gain little (less than $500 per year) or nothing. Given the large revenue costs of splitting, those who do not gain from splitting would end up losers -- through offsetting tax increases or curtailed public services.



Moreover, income splitting would create disincentives for second earners -- usually the wife -- to re-enter the labour force or expand work hours. This could have adverse effects on work experience and lifetime earnings, making them more economically vulnerable. It is telling that advocates of splitting often invoke the image of the traditional family with mom at home minding the kids.



What is the rationale for proposals with such large costs, skewed benefits, and distorted incentives? Recalling claims by the Reform Party and Conservative Alliance that the tax system penalizes one-earner couples, contemporary advocates assert that couples with the same total income should pay the same tax regardless of how the income is divided between spouses.



What that notion of equity ignores is that a one-earner couple with the same total income as a two-earner couple enjoys several advantages: more home-produced services, lower work-related expenses, and lower payroll taxes. Money incomes earned by working need to be adjusted by these factors for a proper comparison.

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However, even judged by that flawed rationale, the use of splitting would, on our estimates, tip the balance too far the other way. One-earner families would be advantaged by lower burdens, rather than "penalized" relative to equal-income two-earner families.



The pursuit of income splitting policies would be a misguided, costly venture for both the federal and Ontario governments and any other provinces that chose to follow. If all governments adopted the Ontario proposal to allow splitting for all couples, the annual revenue cost would exceed $9-billion.



Instead of income splitting, policies should build on existing programs such as the Universal Child Care Benefit, Employment Insurance maternity and parental benefits, the Working Income Tax Benefit, the National Child Benefit System, and the Child Tax Credit. Policies of these kinds would offer a far better basis for addressing the true needs of families while avoiding all of income splitting's adverse consequences.



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