Columnist Andrew Coyne is a huge fan of the Conservative government's new income splitting proposal. It's in the interest of fairness, you see. Single-earner couples, so his logic goes, aren't getting a fair shake in being taxed more than their dual-earner couple counterparts with the same total income.
By now, however, we are familiar with some of the patently unfair aspects of the Conservative scheme. There's the fact that the tax giveaway stands to exclude single parent families that need the most help. Or that even with the $2,000 cap, benefits from income splitting will accrue disproportionately to wealthy single-earner families.
But more to Coyne's point, there is another major wrinkle. As Rhys Kesselman, Canada Research Chair in Public Finance at Simon Fraser University, argues convincingly, comparing single-earner and dual earner couples with the same total incomes "ignores the fact the single-earner couple has a spouse out of the paid labour force able to generate significant valued goods and services for the household — goods and services that the dual-earner couple would need to purchase on the market and/or produce in their time spent off."
In other words, benefits from income splitting will go to many couples where the non-working spouse can afford to engage in all sorts of activities and endeavours that might have nothing to with child care. A bit strange when helping families and giving them "choice" in child care is a key part of the Conservative rationale and messaging for the policy.
Let's take a look at a random heterosexual couple; let's call them Jim and Sue. After graduating from university, Jim and Sue get married. Because Sue's employers expect she will have a child and take leave, they are hesitant about training and promoting her. This and other structural barriers in the labour market mean that Sue makes less money than Jim.
When they do choose to have a child, neither Jim nor Sue have employer top-ups to EI parental leave, so Sue ends up taking most of the EI parental leave available to them, at 55% of her salary. This is pretty common in Canadian families. Outside Quebec, 90% of working mothers take leave after the birth or adoption of a child. Only 26% of working fathers do so.
Because child care is competitive and expensive in their city, Jim and Sue haven't found an affordable child care spot when their parental leave expires. So they have to decide between the unlicensed family spot an acquaintance recommended, the $1,600 per month spot near Jim's work, or one parent staying home. Maybe they could ask one of their parents to help out, and Sue could work part-time.
What kind of calculus comes into play when families are making this decision? Not surprisingly, the wages of each partner are important. But research has shown that women's labour force participation is remarkably sensitive to tax rates and child care costs across advanced economies.
Not frequently mentioned in the income splitting debate is that the Canadian tax code already has a slight benefit for couples where one spouse chooses to stay home. A non-earning spouse may transfer their basic personal credit, which will be $11,351 for 2015, to the higher earning spouse. This results in a maximum tax savings of $1,703 for couples with a stay at home spouse. When the non-earning spouse is considering returning to the labour market, they have to consider that every dollar they earn reduces this spousal credit.
If we add income splitting to this mix, it could make the marginal tax rate on the non-earning spouse's first dollar as high as 29%. Consider that child care expenses are on average equivalent to taking on a second mortgage, and it's obvious that there are significant financial barriers to women's labour force participation in Canada.
Clearly Jim and Sue will make the decision that works best for their family, which could be any one of those options. But the decks are not stacked in favour of Sue returning to work.
What are the solutions?
As to Coyne's assertion that income splitting is as good a thing to spend the surplus on as anything else, I have a list of suggestions as long as the waitlist at my daughter's child care provider. Maybe instead of redistributing income between different types of rich families, we could provide the types of universal public services that we all need and value.
Photo: cpabc. Used under a Creative Commons BY-2.0 licence.
