READ THE FINE PRINT
Lots of discussion, debate and disagreement over the Prime Minister’s announcement last Thursday of the Conservative government’s proposals for support of families with children, which will be a critical part of their 2015 election platform.
Good on them. It was well done and politically very clever.
The Liberals and the NDP will have to star playing political catch up. The Conservatives attempted to fulfill a major 2011 election promise to introduce income splitting but tweaked it just a bit by introducing a cap of $2000 a family. This reduced the cost of the proposal, but hasn’t changed the fact that only 15 per cent of families will benefit at a cost of just under $2 billion a year. Most of these families will have six figure incomes.
This income-splitting initiative was paid for by eliminating the child tax credit, which goes to all families with children and also cost just under $2billioin a year. In other words take from all families with children and give to 15 per cent of high-income families with children.
The Minister of finance says we should look at the total package, so why don’t we. It would have been helpful if the Finance Department had published helpful comparable family data but they didn’t. Indeed the Finance examples seem purposely intended to confuse Canadians. We will have to do with what we have.
According to the Department of Finance this is how a one-earner family, with two children under the age of six, earning $60,000 would benefit from last week’s announcements. As a result of income splitting they would receive $1,055 in tax relief in early 2015 when they claim the Family Tax Cut on their 2014 returns. In the 2015 taxation year they would receive an additional $1,605. In other words in the 12-month period beginning in January 2015 this family, as a result of income splitting would receive a tax refund of $2,660.
But it gets better because these families also benefit from the enhanced Universal child Care Benefit (UCCB). According to the Department of Finance this family would get $1,440 over a 12-month period. Unfortunately they have to pay tax on this and they will lose the child-care tax credit, which is being eliminated to pay for income splitting. They will be left with $536 a year after deductions and eliminations.
Nevertheless this one-earner couple will walk away with $3,196 in the 2015 taxation and election year.
Lets look at what a two earner couple earning $60,000 with two children under the age of six would get from the recent announcements.
First, this couple would get nothing from income splitting, now known as the Family Tax Cut. This shouldn’t be a surprise since it only applies to 15 per cent of families.
With two children under six the enhanced UCCB would yield a benefit of $1440. However, after deducting tax and the elimination of the child tax credit the family is left with $435.
The increase in the child-care expense deduction for the 2015 tax year would provide $440 in additional tax relief.
In 2015 a two-earner family would receive $875 in tax relief compared to a similar one-earner family, which would receive $3,196. In other words for every dollar of tax relief a two-earner family gets a one-earner family with the same income will get $3.50 --three and a half times as much.
This would also be the case for single earner families with the same income.
Supporters of income splitting argue that this change to the tax system would correct a basic unfairness of the tax system where two families with similar incomes pay different taxes. A single earner family with income of $60,000 should not pay a higher tax rate than a two-earner family earning $60,000. In other words for the tax system to be “fair” these families should pay the same tax.
In our view this definition of “equality” and “unfairness” is too narrow. It assumes that if families earn the same income they are “economically equal”. This is of course not true. Families are “economically equal” if they face the same “economic circumstances”. In other words they have the same economic choices available to them and face the same economic costs.
A two-earner family in no way faces the “economic circumstances” as a single earner family with the same income. A single earner family has the choice for one spouse to stay home while maintaining a $60,000 income, whereas a two earner family does not have that choice unless they want to have their income cut in half. To put it another more understandable way these two families have completely different standards of living and if so there is no public policy reason why they should face similar tax rates.
The debate has started and good for that.
The Conservative proposals take up a large part of the surplus but puts money in taxpayer’s pockets, some more than others. They do absolutely nothing for economic growth and job creation.
But do Canadians care? Is a few dollars in their pockets the only thing that matters?