Who wins with income splitting?
If Stephen Harper’s goal was to design a tax policy to make income inequality in this country even worse, he can pat himself on the back. That’s exactly what the Conservatives’ family income-splitting tax scheme will do.
Research from various organizations across the political spectrum has demonstrated already that this tax policy, projected to cost the federal treasury $3 billion in 2015, would be an expensive and inequitable tax giveaway.
Pushed by social conservative groups like the Institute of Marriage and the Family Canada and REAL Women of Canada, income-splitting would benefit very few Canadian households — while lining the pockets of wealthy, traditional families with one breadwinner and a stay-at-home spouse looking after the kids.
Today, the Broadbent Institute released a new study further detailing just how unfair this policy would be in practice.
The study found that nine out of 10 Canadian households would receive no benefit at all from income-splitting — and less than one per cent of all households would be eligible for benefits in excess of $5,000.
The study goes further, adding to the existing literature by estimating benefits based on the earnings and tax bracket status of Canadian families. In doing so we found a disturbing pattern: The effect of income-splitting would be distributed unequally by region, with families in Alberta benefitting most and those in Quebec least.
The study also shows that most of the families the tax scheme targets and is supposed to help — those with children under 18 — stand to get nothing out of it. That finding shreds Conservative talking points about ‘helping families’. You know a tax scheme is a terrible idea when most of the people it’s supposed to help won’t see a dime from it.
Let’s take a closer look at how the benefits break down by region:
The percentage of families with children under 18 getting no benefit from income-splitting is highest in Quebec (61.1 per cent), Prince Edward Island (57.6 per cent) and Manitoba (55.7 per cent). It is lowest in Alberta (44.1 per cent).
The average benefit for families with children under 18 (a figure which disguises the fact that most of these families would get nothing) also varies significantly by province. It is highest in Alberta — $1,359 — and lowest in Prince Edward Island ($488) and Quebec ($510).
To gain from income-splitting, a family with children under 18 must have two parents in different tax brackets to share income. So single-parent families and those with partners in the same tax bracket lose out immediately.
When accounting for available refundable and non-refundable tax credits, the study estimates that 54.1 per cent of families with children under 18 would see no benefit, and another 12.8 per cent of would receive less than $500. Together, those families account for two out of three households which are supposed to somehow benefit from income-splitting.
The biggest winners would come from the 3.7 per cent of families with a single household breadwinner able to shift up to $50,000 of taxable income from the top marginal tax rate of 29 per cent (that’s the rate on any income above $136,270) to the bottom rates of zero and 15 per cent, resulting in an average benefit of more than $7,000.
Just 1.7 per cent of all Canadian families with children under age 18 would be eligible for the maximum benefit. So the policy is simply unfair.
The benefit from income-splitting averaged across all households is only $185 — though again, that figure is almost meaningless, since nine out of 10 households would get nothing at all. Factor in the fact that income-splitting would cost the federal treasury $3 billion a year and you start to see how income-splitting stands to impose a net cost on many Canadian households.
The late Jim Flaherty nailed the problem quite well when he said that income-splitting “benefits some parts of the Canadian population a lot, and other parts of the Canadian population virtually not at all.”
Governments have to apply a simple test when making public policy decisions that affect income inequality: Does this idea make the problem better or worse?
Income-splitting is a scheme to transfer wealth from the bottom 90 per cent of households to a handful of wealthy traditional families. It fails the test.
This article originally appeared on iPolitics.ca.