Tuesday, 29 March 2011

To Income Split or to Not Income Split, Not The Question

So Stephen Harper announces a plan to implement Income Splitting for families once the budget is balanced. I figure this will happen around the same time when we solve Climate Change or discover World Peace.....

There has been much to-ing and fro-ing over whether this is a fair initiative or an attempt to start a Mommy war. Stephen Gordon Frances Woolley summarizes some of that here.

I must admit, as a single income family where my wife stays home and takes care of the kids, this appeals to us. If it even happens. But I acknowledge that what is good for my family is not good for all families.

A rationale supporting income splitting is that once you have a family, you don't really have individual incomes anymore, you have a family income. With our progressive tax system, income splitting is an attempt to smooth out the progressive tax rates for families with dissimilar individual incomes. (UPDATE: Further Argument found here) When it comes down to it, this is the purpose of RRSP tax deferral system. Defer your high income taxes now so that you pay less income tax when you retire when your income is supposedly lower. Problem with both income-splitting and RRSPs is that this progressive tax levelling either doesn't work for everyone or doesn't apply equally to everyone. So we have imperfect and complicated policies in place that serve to level out the progressive tax system and help you lower your declared income into a better bracket.

So what is the actual problem then? The problem is with our progressive tax system! Check out the breakdown here.

I am a flat tax supporter, (I also support eliminating tax credits and rebates too) but I think even progressive tax supporters can see the problem here. The tax brackets as laid out really stick it to the middle class. Why is the top bracket at an income of $128,800? While a 6 figure income sounds amazing, average home prices and the cost of living mean that $128,800 is only a decent middle class income. Differentiating between $40k and $100k really lets the true upper class off the hook and screws over the bulk of the middle class. I find it ludicrous that under progressive tax values that a million a year income is in the same top bracket as $128,800! So lets change the progressive tax system (if not outright eliminate it). To really help families, make the first $10,000 tax free, up to $40,000 the first bracket, up to $200,000 the next and over $500,00 the top bracket. These are only my top of the head suggestions, I don't want to quibble over the values presented here, come up with your own if you must. My only point is that the brackets we have are much too close together and biased towards the low and of the income range.

In any event, I am certain we can permanently level out our tax system in a revenue neutral way that truly benefits all low and middle income families, regardless of makeup. And that is the only fair way to do this without pitting working mothers and stay-at-home mothers against each other.


M@ said...

I absolutely agree. The brackets in Canada are screwed up, and don't reflect reality at all. In fact, I would be in favour of higher rates at the top of the scale, and the personal amount being closer to the poverty line. That's where you do the most to ensure that those who have the least, pay the least.

I wonder, though, why income splitting is only for those who have children. I understand that parents have a whole ton of other costs that childfree couples don't, but they also use a ton of services that childfree couples don't. Meanwhile, I (willingly) pay a ton of money for school taxes without my family directly benefiting from them. Making it for parents only seems awfully like pandering.

Catelli said...

♪ "I believe the children are our are future. Teach them well and let them lead the way..." ♫

That about sums up the argument for helping families with kids. But it shouldn't be done through income taxes. That's why I think it should be a flat tax for all/most of income earners. If we all pay the same, no need to average it out.

Catelli said...

To clarify: I think the family argument is quite trite when used to justify income tax credits or other means of lowering income taxes for families.

Families (with children) are important, but should be supported or assisted through other means.

M@ said...

There's already a program for helping families with kids -- there's a pretty hefty child tax credit, isn't there? Adding a new program that only benefits families that are already getting the benefit of an existing program seems unnecessary. (Note that I wouldn't be opposed to raising the child tax credit, necessarily; but let's not say "income splitting" and then ignore the many couples without children of age who should, but won't, benefit from it.)

And thanks for putting that song into my head, you bastard! :)

Catelli said...

Yes there are child tax credit programs at federal and provincial level (in Ontario at least), and they are weighted towards lower income families.

Oh and you're welcome! (By the way, it backfired a bit, it is stuck in my head now too!)