This week has been a watershed moment in the battle against income inequality in Canada.
The curious twist is that it was comments made by Jim Flaherty – who, as Finance Minister, has actually exacerbated income inequality – that illuminate a fundamental shift in Canada’s political imagination.
Sometimes, the world works in mysterious ways.
A lot of ink has already been spilled about Mr. Flaherty’s unexpected decision to publicly repudiate family income splitting, the day after tabling a budget that set up the Conservative government to deliver on precisely this tax cut. After all, it’s not every day that a finance minister chooses to oppose a key electoral promise of the prime minister.
Mr. Flaherty’s comments immediately split the Conservative caucus, forcing Prime Minister Stephen Harper to cast doubt publicly on what was expected to be the core goody in the Conservative’s re-election arsenal.
While the political questions surrounding Mr. Flaherty’s decision to speak out are intriguing, it is the precise words that Mr. Flaherty used to articulate his opposition to income splitting that matter most.
“It benefits some parts of the Canadian population a lot. And other parts of the Canadian population virtually not at all,” Mr. Flaherty said. Earlier, he had mused that the tax measure needed “a long, hard, analytical look” by experts “to see who it affects in this society and to what degree. Because [he wasn’t] sure that overall it benefits our society.”
Given this government’s clear track record of introducing boutique tax initiatives that favour the wealthy, this sudden concern with equity is striking.
Mr. Flaherty, of course, is right about this $3-billion Mad Men giveaway.
Family income splitting would benefit only a small minority of families, giving a significant tax break to high-income traditional families with one earner and a stay-at-home spouse, while delivering little or nothing to middle- and lower-income families and nothing to single parents.
According to the Canadian Centre for Policy Alternatives, the top 5 per cent of all families would see more benefit from this tax change than the bottom 60 per cent – and 86 per cent of families would see no benefit at all. It would, in effect, actively make income inequality, not to mention gender inequality, worse.
But the Conservatives surely knew these troubling facts when they made the promise (emphatically and repeatedly) to introduce income splitting back in their election platform in 2011. So something changed in the world around Mr. Flaherty.
And that something, I believe, is the maturing of income inequality as an issue in the imagination of the Canadian public and, as a result, in the considerations of the politicians that serve us.
It is this maturing that allowed Mr. Flaherty not only to recognize that income inequality is a serious problem deserving of attention; but also to acknowledge that government – even Conservative governments – should not enact tax policy that deliberately makes the situation worse.
The story of how this change came about is yet to be told, but it no doubt has its roots in the tireless work and advocacy of citizen and civil society groups, academics, brave politicians and other equity-seeking voices. This change remains a tentative victory, as Conservative cabinet ministers continue to pop up this week to split with Mr. Flaherty and defend family income splitting and its genesis in the determined lobbying of social conservative pressure groups.
And the unfortunate reality is that we are still becoming ever more unequal, a trend due in large measure to political choices. Many countries have found ways to mitigate the growth of income inequality, while in Canada the policy response has tended to reinforce rather than offset the trend.
We know that since the mid-1990s, the social role of government has been dramatically cut back and its redistributive impact has faded. According to the OECD, government taxes and transfers lowered the gap between rich and poor most in Canada, Denmark, Finland, and Sweden in the late 1980s and the early 1990s. By the early 2000s, we joined Switzerland and the U.S. as the countries with the smallest redistributive impact.
That’s why I take caution not to overstate things here. But I do believe Mr. Flaherty’s remarks signal some hope that there is growing public support and political will to address income inequality. At the very least, important public policy will now be tested against a simple and compelling principle: Does this make income inequality better or worse?
This article originally appeared in the Globe & Mail.
Discouraging women from working outside the home is surely not an appropriate goal for tax policy. But that may just be the motivation behind the Harper government's plan to introduce "income splitting" for families — an expensive tax gift to traditional families with one breadwinner and a stay at home spouse.
The gift is already proving costly to Conservative party unity. The Harper government's own finance minister is speaking out against the policy that would deprive the treasury of tax revenues while benefitting mainly big earners.Read more
Presumably, Jim Flaherty considered the same economic picture of the country as the rest of us when planning the 2014 budget.
That picture is not rosy.
Almost one and half million Canadians are currently out of work. The unemployment rate remains stubbornly high at 7% and the employment rate (the proportion of the working age population with a job) has yet to recover since the great recession. For youth, the unemployment rate is almost double that, at 13.9%.Read more
Joe Friesen / Globe & Mail
When Jim Flaherty introduces his budget next week, he may trumpet a long-promised policy that would allow parents with children at home to split their income to reduce the amount of tax they pay.
Income splitting is a tax policy that would allow a higher-earning person to assign some of his or her income to a spouse, effectively lowering what tax bracket he or she is in. The policy brings the most benefit to a couple in which one spouse works while the other stays at home with the kids, and could cost the treasury a few billion dollars of lost tax revenue a year.
But the policy can also be seen as a tailored appeal to voters in the constituencies the Conservatives need to hold to keep their majority.
Family income splitting was first promised back in the 2011 election campaign, with the caveat that it wouldn’t be introduced until the budget was balanced. Three years later Mr. Flaherty is expected to announce that the government is on course to get out of the red by next year, just in time for an election-year budget.
The Broadbent Institute launched a campaign this week, calling the income-splitting proposal a $3-billion Mad Men giveaway. They describe it as a misguided policy that favours the wealthy and is based on an early 1960s concept of the traditional family. On the other side of the coin, University of Calgary economist Jack Mintz and lobby groups such as the REAL Women of Canada have long argued for such a measure, on the grounds that it would remove a tax penalty for those families that want to have a parent stay at home but struggle to make it work financially.
Kevin Milligan, an economist at the University of British Columbia, said the policy would benefit only a small subset of families. For one, single parent families are ruled out. They make up 16 per cent of all families. What’s more, nearly 14 per cent of the population aged 15 and over lives alone, a rate four times higher than it was in 1961. About one in five people did not live in a census family in Canada in 2011.
So having removed all those millions of people from eligibility, the policy would also be of little or no benefit to those families where each parent earns roughly the same amount, or even those cases where they’re in the same tax bracket. It would be of most benefit to those families with a very-high earning breadwinner and a spouse who stays at home and earns nothing. That’s a relatively small group.
“Imagine it was your goal to transfer resources to families that choose to have a stay-at-home spouse and are struggling with their finances, then this is an odd policy to hit those people,” Prof. Milligan said. “If I had a couple billion to spend on remedying the inequities in our society, spending it on lowering the taxes of a $200,000 and $0 [incomes] couple is not where I would spend it.”
So why pursue it? It represents a marriage of ideological and strategic goals. One clue comes from the accidentally leaked Conservative strategy document about the ethnic vote in the last campaign. It said of certain ethnic groups “they live where we need to win.” The same is true of families with children. The key seats that are vulnerable to a Liberal resurgence are those suburban ridings around big cities, primarily in the Greater Toronto Area. The Conservatives need to hold on to them and they are rich with families with young children.
Take, for example, Brampton West, a Conservative gain in 2011. Roughly 54 per cent of families in that riding have children at home, much higher than the Canadian average of 36 per cent. The same is true for many other similar ridings, such as Mississauga-Brampton-South, Ajax-Pickering and Pickering Scarborough-East, which have above-average numbers of families with children at home.
The Conservatives will still have to work hard to get them to the polls though. A StatsCan study of the 2011 election found that “the presence of children was negatively associated with 2011 voting in all family types.” Single parents with kids under five had the lowest turnout figures at 36 per cent. Couples with children under five voted at a 60 per cent rate, very close to average.
"It’s absurd that the Conservatives plan to take a $3 billion surplus and spend it on a tax giveaway to high-income families — it’s as though the government is trying to recreate a society straight out of an episode of Mad Men," said Executive Director Rick Smith. "Today we are taking the first step in speaking out against the proposed Conservative family income splitting plan that will exacerbate inequality in Canada."
Under the Conservative plan, a two-parent family with children under 18 will be allowed to split up to $50,000 of their income for tax purposes.
"An analysis of the plan shows 86% of Canadians, including single mothers and low-income parents in the lowest tax bracket, will receive no benefit whatsoever from the scheme," added Smith. "And the top 5% of families would see more benefit than the bottom 60% of families."
As part of the campaign, the Broadbent Institute is launching a contest asking Canadians how they would invest the money lost to income splitting. "The Broadbent Institute will be making it a priority over the months ahead to draw attention to income inequality and the terrible ways income splitting threatens to make this problem much worse," said Smith.
Learn more about the Broadbent Institute's income splitting campaign at www.broadbentinstitute.ca/madmengiveaway.
From deepening income inequality to rising unemployment, Canada faces a wide range of pressing economic challenges that ought to be addressed in next week’s federal budget. Yet little is expected in the way of, for instance, sorely needed measures to address our jobs crisis. Instead, the Conservative government is focused on balancing the budget so it can deliver on its highly political and expensive promise of a pre-election tax break.
According to the C.D. Howe Institute and the Canadian Centre for Policy Alternatives, the Conservative plan to introduce family income splitting will mean some $3 billion per year in lost federal revenues, and some $5 billion per year if the provinces follow suit.
What services and programs will be cut to finance this?
The ongoing slashing in Ottawa holds unsettling clues. Federal cuts to science and our social safety net, as well as the squeeze on transfers to the provinces that support programs like health care, are bound only to get worse. And all this in order to balance the budget for what amounts to a tax gift for the affluent.
Family income splitting would benefit only a small minority of families, giving a big tax break to high-income traditional families with one earner and a stay-at-home spouse, while delivering little or nothing to other families.
The move would allow couples with children under 18 to share up to $50,000 for tax purposes. That translates into a tax cut of more than $6,000 per year for a couple with one person in the top tax bracket. In the case of someone earning more than about $185,000 per year, income-splitting would allow the full amount of $50,000 to be shifted from the top to the bottom tax bracket, thus cutting the tax rate on that money nearly in half.
Single-parent families, already more vulnerable, account for more than one in four children, yet would receive nothing from the tax break. Nor would there be a benefit for working couples with children in which neither parent earns more than about $45,000. That is because both earners are already in the lowest tax bracket.
The math of income-splitting is such that there would be only small savings, if any, where both parents earn between about $45,000 and $135,000. In fact, according to the Canadian Centre for Policy Alternatives, the top 5 per cent of all families would see more benefit than the bottom 60 per cent — and 86 per cent of families would see no benefit at all.
This tax measure will be sold as a way to support families who choose to have one parent (usually the mother) stay at home to care for children.
If the Harper government really wanted to expand choices for families with young children in a fair way, it could improve maternity and parental benefits under employment insurance. This program allows for up to one year’s paid leave from work, but benefits are so small — on average, just over $400 per week — that many families have to cut the leave short.
Alternatively, the government could increase child benefits for lower-income families so that families choosing to work fewer hours, and thus to earn less, get more support through higher child tax credits.
The $3 billion that income splitting will drain from federal coffers would be enough to increase federal spending on child tax credits by more than 25 per cent. Or to double current spending on maternity and parental leave benefits. Or to make a significant contribution toward enhanced access to quality child-care programs.
But none of those policies would achieve what the family income splitting proposal is designed achieve: to prop up the traditional family model by encouraging one parent to stay home. Call it Harper’s $3-billion Mad Men giveaway.
No wonder the policy has been actively promoted by social and religious conservative organizations such as REAL Women and Focus on the Family Canada, which have opposed public child care and are strong believers in the traditional single-earner family.
While income splitting will be advertised as a boon to the middle class, it is in fact a gift to the well-off and a surreptitious sop to the socially conservative. It will benefit almost no one else.
It is a sad statement that the No. 1 priority of the government’s upcoming budget is to lay the groundwork to introduce a tax measure that will further increase income inequality while failing to meet the needs of the vast majority of families with young children.
This article originally appeared in the Toronto Star.
In last year’s Speech from the Throne, the Harper government promised to introduce legislation to require “balanced budgets during normal economic times, and concrete time lines for return to balance in the event of an economic crisis.”
This proposed legislation makes little sense in terms of sound economic policy. But it will likely be introduced as part of the federal budget, expected early next month.
As Christopher Ragan argued in a previous Economy Lab commentary, it is simplistic to think we can set out firm rules for responsible fiscal policy, the conduct of which demands a nuanced understanding of the state of the economy and of public finances.Read more
The job numbers for the end of 2013 could not have been much worse than this. But don't expect the Harper Conservatives to do anything about it in a February federal Budget which will be all about 2015 pre-election politics.
In December, the Canadian economy lost 60,000 full-time jobs, and the national unemployment rate rose sharply from 6.9 per cent to 7.2 per cent. The youth unemployment rate jumped from 13.4 per cent to 14 per cent.
While the Conservatives have bragged about the strength of the recovery, the proportion of Canadians with jobs was down in December from a year earlier, and the unemployment rate was up, from 7.1 per cent to 7.2 per cent.
In short, no progress was made in 2013.
The prospects for 2014 are not rosy. Most forecasters expect little improvement on the jobs front as the housing boom slows and households, now with record-high levels of debt, slow down their spending. The hard-hit manufacturing sector continues to shed jobs as new plant closure announcements multiply.
There is a lot that the federal government could do to help sustain and create jobs, especially for hard-hit young people and recent immigrants.
We could take advantage of still very low interest rates to finance major new investments in public and environmental infrastructure, including public transit, which would both create jobs and reduce carbon emissions.
We could invest in innovation, skills, and research and development to transition from our overreliance on resources to a more sophisticated Canadian economy.
We could lighten up on cuts to public services which kill jobs even as they harm Canadian families.
But the federal budget will do close to nothing along these lines since the Harper Conservatives have only one goal: to set the stage for pre-election tax cuts in the 2015 budget.
They can't cut taxes till they have balanced the budget. So this year, the order of the day will be no new programs, and even more cuts to jobs and services. Watch for new austerity measures on top of already announced cuts which will see federal direct program spending (program spending minus transfers to persons and minus transfers to provinces) fall by $5.3 billion from 2013-14 to 2014-15.
These deep cuts are being imposed in spite of the fact that the federal debt is already falling as a share of the economy. Even bank economists say that there is no particular hurry to eliminate our remaining modest deficit.
The race to balance the federal budget is motivated not by economics but by the political determination of the Conservatives to deliver a big personal tax cut just before the 2015 election in the form of income-splitting for families with children.
No one is against a break for hard-working families, or measures that would allow parents to spend more time with children – but is income splitting the way forward? We could, for example, expand parental leave benefits under the Employment Insurance program so more parents could afford to take up to a year off work after the arrival of a child.
But the Conservative proposal to allow a shift of up to $50,000 between partners in a family with children up to age 18 is deeply flawed.
There would be no benefit at all to the one in four children who live in single parent families, nor would there be much (if any) benefit to lower-income families with two earners where neither earns above the $50,000 needed to move out of the lowest tax bracket. Stephen Harper is essentially proposing that we transfer more of the tax burden onto single-parent and lower- and middle-income families.
During the last federal election, Stephen Harper promised that his Conservative government would introduce a new way to tax families with children after balancing the federal budget.
We are likely to hear a lot more about the merits of Harper's 'income-splitting' proposal before the 2015 election. The Conservatives continue to slash spending and erode public services precisely in order to create the fiscal room for this promised tax cut. Never mind that Mr. Harper’s aggressive agenda of tax cuts has already helped turn a $16 billion surplus in 2006 into annual deficits.Read more