Why I Oppose Income Splitting

Last week, the Canadian government announced that they are following through with a new addition to our tax policy: income splitting.

The idea behind income splitting is that qualified couples combine their incomes together and pay a reduced total tax rate than they would separately. If one spouse brings in a much higher income than the other (for example, if one is the “breadwinner” and the other is unemployed), then the couple can ‘share’ a newer, lower income to report, and thus will be taxed a smaller amount. Only couples with children under 18 qualify. Of course, there is more nuance to the new policy, but to boil it down to simplistic terms, that’s income splitting 101.

Despite the idea being batted around since 2011, income splitting immediately came under criticism from Opposition parties and the media when the Conservatives made the announcement. Rightly so. Income splitting provides a tax cut for rich families, plain and simple. And my argument is this:

a) Income splitting does nothing to alleviate inequity in the tax system;

b) The evidence for high-income tax breaks as an economic stimulus tool is shaky at best;

b) There are many, many other people and areas of support which need that funding.

Yes, income-splitting will also help some lower- and middle-income families as well, but the beauty of the complicated tax code is that governments are able to target tax breaks to whomever they want. That income splitting helps high-income families is no coincidence, nor is it an ancillary effect that cannot be helped. The fact is, high-earning families traditionally vote Conservative, and Stephen Harper wants to ensure they show up to the polls in 2015.

Proponents of income splitting argue that the policy reduces inequity in the tax system, as it recognizes that spouses often act as a single financial entity, sharing bank accounts and expenses. Why should they be penalized for acting as a single family unit, when that’s what works for them in every other aspect of their lives?

But what does equity mean? Equity means that those who are most vulnerable, through no fault of their own, are given the help and support they need to compete with those who have had it easier. Reducing inequity means ensuring that disability pay can cover rent and groceries. It means ensuring low-income students are not straddled with debt upon graduation (or the threat of massive debt, which acts as a deterrent for low-income families to send their children to school in the first place). It means providing those with mental health diagnoses and addictions have access to proper treatment, so fewer of them end up on the street each night. Income-splitting supporters are not arguing that the policy is more equitable, they’re arguing that it’s more equal — terms which are not the same thing.

Wealth and income inequality is at record-highs in North America, creating a tiered society with a dwindling middle class. According to Statistics Canada, the top 10 per cent of Canadians have seen their median net worth grow by 42 percent since 2005, while the bottom 10 percent’s median net worth shrank by 150 per cent. The top 20 percent in Canada control 70 percent of Canada’s wealth. Our government’s policies should be aiming to reduce this inequality, not promoting it.

The government estimates that they will lose approx. $2.4 billion in forgone revenue from income splitting. That’s $2.4 billion that could be used for education, health care, investment in renewable energy, transportation infrastructure, and creating jobs. These investments will grow our economy and make everyone more prosperous, rich and poor.

As for tax-breaks as an economic stimulus tool, studies have made it more apparent that when tax breaks are given to the highest-earners, it does not contribute as much to growing the economy as many would think. Call it what you want: trickle down economics, Reaganomics, etc. To grow the economy, more people from all income levels need to be spending. Evidence shows us that the bottom 50–60% have less and less disposable income than ever before. Income splitting does very little to change this, and indirectly exacerbates the problem by not spending the $2.4 billion to help stimulate the economy in other ways.