As the tax deadline nears for Canadians, some plan to take advantage of a new income-splitting tax break for families. But UBC economist and member of the Economic Advisory Council for the Liberal Party of Canada, Kevin Milligan, says the measure will only benefit those at the higher end of the income spectrum. His proposal? A new tax model that treats employment and investment income differently.
This is the first year income splitting comes into effect. Will it help ease the financial burden on families?
I think it’s quite an odd tax measure that gives a tax credit to some families and not to others. Whatever merits it may have, when it comes out the other side, it’s a bit of a Frankenstein’s monster.
In order to benefit at all from this, you have to have two spouses filing taxes together, and they have to have different incomes. The families who benefit the most will be those with the biggest gap between the incomes of the two spouses — where one spouse stays at home and the other earns quite a bit.
If you’re a single-parent family, or a two-parent family with both spouses earning the same income, there’ll be no benefit.
Can you give an example?
The basic comparison to make is that the tax burden on a family making $100,000, should be the same whether it’s two spouses each making $50,000 or one spouse making $100,000 and the other zero. Unfortunately, it’s not a very good comparison.
The household that has one parent earning $100,000 has another advantage that the $50,000-$50,000 household does not: it gets to have a “household manager” of sorts at home.
Imagine a household where the mother is a schoolteacher, and the dad works installing phones for Telus. Think of what they have to do every single day: scrambling to get their two kids picked up from school and then shuttled to basketball practice and piano lessons and finally to bed on time at the end of the day.
Compare that to the household where only one of the parents is working, bringing in $100,000. Maybe the principal earner is a professor in the economics department and her stay-at-home husband is preparing home-cooked dinners, shuttling the kids around and volunteering at school.
It’s ludicrous to suggest that these families are comparable.
Do you have an alternative plan?
My priority isn’t fixing the inequity between different kinds of rich families. My proposal is to address income equality with a dual income tax that treats employment income and capital income differently.
In Canada, the U.S., the U.K. and many other countries, highly-paid employees have really been driving the inequality. So you can have a more progressive schedule on earned income, but at the same time, make sure that the tax system continues to be attractive for capital investment by taxing capital income on a different schedule.
Right now we tax capital income and earned income in the same way. The challenge that we face when changing the tax system is that capital might tend to leave Canada. With capital income, you can shift assets around: redefine it through a numbered company here, shift some property rights to a company in Bermuda—there are lots of tricks if you have access to them. It’s much more difficult to do that with employment income.
I think that we could improve the confidence of people in the integrity of our tax system by being more realistic on the capital-income side and tougher on the employment income side.