Family Tax Splitting

[Saturn]

A "family" does not generate income. Individuals generate income. I am sure that you are aware of the fact that your employer pays you for your work, not your family for your family's work.

Agreed that the "family" doesn't generate income, individuals do. But you are presuming that we need to tax income in the same way that it is generated. This is not true even today without income splitting or considering family income. For example two people making exactly the same income may pay different amounts of tax. One may be a single parent and is able to claim the "Amount for Eligible Dependant" which the other cannot.

Yes, you are advocating this for personal gain. That doesn't make it reasonable. I could argue that all family tax credits should be eliminated because that would be in my benefit. As it currently is, I am partially funding your spouse's choice not to work. Don't push me any further.

This would make people responsible for what other members of their family do. I don't think that putting you in jail for what your wife did would seem reasonable to you. Similarly, giving you a huge tax break for what your wife doesn't do (work) doesn't make much sense either.

I guess it depends upon what you think is a reasonable presumption. I think it is unreasonable to assume that you control the actions of other family members, so it is therefore unreasonable to throw you in jail for whatever crime your wife does (assuming you had no role in it). It is however reasonable to presume that a family will pool income and share the proceeds, so it may be fair to tax on that basis. Of course this may not be true in all families.

You are free to pool your income with anyone you want. Who you pool your income with and how you spend your income is your own personal choice. Your spouse has CHOSEN not to work and that's a personal choice as well - I have nothing to do with it. You cannot hold me responsible for the choices you make. It is not my responsibility to fund your spouse's choice to not work. The income-splitting proposal is a money transfer from 2-income earner couples, to single income couples. In other words, it would force me and my spouse to pay for the personal choice you and your spouse made. We already pay for your choice, don't push me to pay more.

In my view both models should be accomodated, or better still, make the distinction moot by adopting a flat tax model.

I would totally agree with a flat tax model provided that we get rid of all other taxes. One-rate, one income tax is all we need. We don't need 100 different taxes that are complicated as hell and require 100 different administrations to enforce.

[Renegade]

Yes, you are advocating this for personal gain. That doesn't make it reasonable. I could argue that all family tax credits should be eliminated because that would be in my benefit. As it currently is, I am partially funding your spouse's choice not to work. Don't push me any further.

Huh?? I have no spouse. I don't stand to gain in any income splitting proposal. I have no idea what you are talking about.

You are free to pool your income with anyone you want. Who you pool your income with is your own personal choice. Your spouse has CHOSEN not to work and that's a personal choice as well - I have nothing to do with it. You cannot hold me responsible for the choices you make. It is not my responsibility to fund your spouse's choice to not work. The income-splitting proposal is a money transfer from 2-income earner couples, to single income couples. In other words, it would force me and my spouse to pay for the personal choice you and your spouse made. We already pay for your choice, don't push me to pay more.

Saturn, I don't know who you are addressing your comments at, but it can't be me as none of what you are saying applies to my situation.

I'll comment anyway. Whether you like it or not you DO fund choices that other people make. People have kids, and thus incur childcare costs, and get a tax deduction. This means you pay relatively more because of a choice they made. From a tax perspective, this proposal breaks no new ground.

I would totally agree with a flat tax model provided that we get rid of all other taxes. One-rate, one income tax is all we need. We don't need 100 different taxes that are complicated as hell and require 100 different administrations to enforce.

Just because we simplify the income tax system doesn't mean we need to get rid of other taxes. In fact if any tax needs to be eliminated it shoudl be income taxes and consumption taxes should be raised to accomodate the difference. That unfortunately won't happen, so I'd settle for a simpler and in my view fairer tax system

[Wilber]

Let's use a hypothetical example to illustrate what I mean. Lets say husband and wife each have taxible income of $60,000. Assume that the threshold for the taxing at the highest rates starts at $50,000 (ie each of them have $10,000 which is taxed at the highest marginal rate). What I'm saying is that if the threshold was changed to $100,000 but the income taxed was family income (ie $120,000) it is revenue neutral to the government. I think the government would need to look at the broad consequences and could adust rates and tiers so it did not overall raise taxes.

What does your example have to do with income splitting, their income is already split 50/50. There is no advantage to splitting unless there is a substantial disparity in incomes. You are just talking about raising the threshold, it doesn't change the basic fact that if one person is in the top bracket, 100% of their partners income will be taxed at the highest rate. You are just razing that threshold to 100K from 60K, nothing more. While splitting may be an incentive to be part of a couple, taxing their combined income as single could be just as big an incentive not to.

[Saturn]

Yes, you are advocating this for personal gain. That doesn't make it reasonable. I could argue that all family tax credits should be eliminated because that would be in my benefit. As it currently is, I am partially funding your spouse's choice not to work. Don't push me any further.

Huh?? I have no spouse. I don't stand to gain in any income splitting proposal. I have no idea what you are talking about.

Then you are in a particularly generous mood. I don't think that most Canadians are that generous.

You are free to pool your income with anyone you want. Who you pool your income with is your own personal choice. Your spouse has CHOSEN not to work and that's a personal choice as well - I have nothing to do with it. You cannot hold me responsible for the choices you make. It is not my responsibility to fund your spouse's choice to not work. The income-splitting proposal is a money transfer from 2-income earner couples, to single income couples. In other words, it would force me and my spouse to pay for the personal choice you and your spouse made. We already pay for your choice, don't push me to pay more.

Saturn, I don't know who you are addressing your comments at, but it can't be me as none of what you are saying applies to my situation.

I'll comment anyway. Whether you like it or not you DO fund choices that other people make. People have kids, and thus incur childcare costs, and get a tax deduction. This means you pay relatively more because of a choice they made. From a tax perspective, this proposal breaks no new ground.

I recognize that I fund personal choices others make and I said that I fund them enough. Enough is enough. Distributing income from higher income earners to lower income earners is one of the major features of our income tax system. Anything more would bring us closer by just pooling all Canadians' incomes and then giving all Canadians the same amount. That's communism. It takes away the incentives and rewards of hard work and is harmful to the economy.

I would totally agree with a flat tax model provided that we get rid of all other taxes. One-rate, one income tax is all we need. We don't need 100 different taxes that are complicated as hell and require 100 different administrations to enforce.

Just because we simplify the income tax system doesn't mean we need to get rid of other taxes. In fact if any tax needs to be eliminated it shoudl be income taxes and consumption taxes should be raised to accomodate the difference. That unfortunately won't happen, so I'd settle for a simpler and in my view fairer tax system

Consumption taxes are the type of tax that is most harmful to the economy. Consumption taxes kill consumption - the major pillar of our economy. In fact, the way consumption taxes make any economic sense is to levy them on items that are harmful and you don't want people to buy - like cigarettes. To move to a tax system that is entirely funded by consumption taxes would be like moving to a military that has only nuclear weapons. Last time I checked, harming our economy is not something that we normally strive for.

[Renegade]

What does your example have to do with income splitting, their income is already split 50/50. There is no advantage to splitting unless there is a substantial disparity in incomes. You are just talking about raising the threshold, it doesn't change the basic fact that if one person is in the top bracket, 100% of their partners income will be taxed at the highest rate. You are just razing that threshold to 100K from 60K, nothing more. While splitting may be an incentive to be part of a couple, taxing their combined income as single could be just as big an incentive not to.

The example was not to address income splitting. It was to illustrate that taxing based upon family income does not necessarily need to generate a windfall for the government.

[Riverwind]

Consumption taxes are the type of tax that is most harmful to the economy. Consumption taxes kill consumption - the pillar of the economy.

The economy cannot function without savings that provide capital to businesses - income taxes hrt saving. The gov't probably should not rely too much on any one form of taxation, however, consumption taxes in Canada are too low and income taxes are too high. For that reason the gov't should lower income taxes and increase consumption taxes.

[Saturn]

Consumption taxes are the type of tax that is most harmful to the economy. Consumption taxes kill consumption - the pillar of the economy.

The economy cannot function without savings that provide capital to businesses - income taxes hrt saving. The gov't probably should not rely too much on any one form of taxation, however, consumption taxes in Canada are too low and income taxes are too high. For that reason the gov't should lower income taxes and increase consumption taxes.

Nonsense. Business primarily needs to be able to sell its goods and services. No amount of borrowed capital can protect you against consumers not buying your stuff. Saving is important but 80% of Canadians' savings are sitting in their houses, not in their bank accounts.

Income taxes do hurt saving, but consumption taxes hurt consumption. Consumption is far more important for the economy than saving. In fact saving hurts the economy too, unless those savings are directed to activities that encourage economic growth - such as investing in technology and infrastructure that increases productivity. When you choose between income and consumption taxes anyone who has some idea about how the economy works would choose income taxes over consumption taxes.

[Riverwind]

In fact saving hurts the economy too, unless those savings are directed to activities that encourage economic growth - such as investing in technology and infrastructure that increases productivity.

All savings are invested in some way. Even if they are not invested directly a surplus of savings will lead to lower interest rates which helps the economy.

When you choose between income and consumption taxes anyone who has some idea about how the economy works would choose income taxes over consumption taxes.

Well you obviously don't know much about the economy. Taxing income reduces the incentive to work - taxing consumption reduces the incentive to spend. In the long term the health of the economy depends on the willingness of of people to work - not spend.

[Wilber]

What does your example have to do with income splitting, their income is already split 50/50. There is no advantage to splitting unless there is a substantial disparity in incomes. You are just talking about raising the threshold, it doesn't change the basic fact that if one person is in the top bracket, 100% of their partners income will be taxed at the highest rate. You are just razing that threshold to 100K from 60K, nothing more. While splitting may be an incentive to be part of a couple, taxing their combined income as single could be just as big an incentive not to.

The example was not to address income splitting. It was to illustrate that taxing based upon family income does not necessarily need to generate a windfall for the government.

OK, it may not generate a windfall for government but it sure as hell would take away the incentive for two income families to better themselves. I don't really care what the government considers to be revenue neutral, just what I wind up with in my pocket at the end of the month. Revenue neutral just means the government has switched targets.

One reason I am staying retired is the tax system gives me no incentive to work. If I go flipping burgers for minimum wage, I will be taxed at the highest rate on anything I earn. If unemployment was high that might be a good thing because I wouldn't be taking work from someone who really needed it but how does it help the economy when there is labour shortage and a help wanted sign on every door?

[Jerry J. Fortin]

Taxation is a matter of politics and economics. It is a legal means of wealth redistribution. The levels of taxation are roughy calculated to be able to fund a revenue stream sufficient to pay for the expenses of government and the services that government provides. But that doesn't mean that there is only one way to skin a cat.

Income taxes are regressive and they have a detrimental impact on disposable income. Now considering that we live and work in a society where the consumption of goods and services provides the basis of our economy one has to wonder why the government would be intent upon limiting the ability of the citizen to contribute to the economic stability and potential growth of that society.

Obviously governments created the income tax system to transfer the wealth of the citizens to the government in order to pay for the expenses of government. Once created the revenue stream was used to fund other "needs" of the government. These are known facts. The real question is simply what do we want our government to pay for because ultimately it is we who pay for it through our taxes.

Within the current system we find ourselves between a rock and a hard place. Cut a tax and reduce a service, that is the only way it works right now. There are alternatives out there if you look for them but they are few and far between. It takes a brave politician to step outside the box and do something different.

To get back to the current disussion within this thread, monkeying around with marginal rates and income splitting are mere political tools and represent no new solution to the problems we face. Harper is placing himself into position to take care of demographic driven politics, which isn't exactly silly. It will probably work for him. All new tory policy is directed at our aging demographic, who also by the way represent a vast majority of the voting public. Apathetic senior citizens are not common.

[Saturn]

In fact saving hurts the economy too, unless those savings are directed to activities that encourage economic growth - such as investing in technology and infrastructure that increases productivity.

All savings are invested in some way. Even if they are not invested directly a surplus of savings will lead to lower interest rates which helps the economy.

When you choose between income and consumption taxes anyone who has some idea about how the economy works would choose income taxes over consumption taxes.

Well you obviously don't know much about the economy. Taxing income reduces the incentive to work - taxing consumption reduces the incentive to spend. In the long term the health of the economy depends on the willingness of of people to work - not spend.

Quite the opposite. Consumer spending is what drives the economy. If consumers want to buy, businesses will provide. The problem with a consumption tax is that it hits consumption directly.

Income taxes on the other hand can actually encourage consumption. Income taxes shift income from high-income earners to low-income earners. Income taxes are approximately neutral to the middle class. The middle class will be paying approximately the same whether we use income taxes or consumption taxes. The difference between the two comes at the low and high ends of the income distribution. Multi-millionaires generally consume a small percentage of their incomes - the rest goes into savings - investment (a large portion of that goes overseas). Low-income earners consume their entire incomes. If you give them an extra dollar, they will go out and spend it, not invest it in China. The same goes for foreign investors in Canada. If we don't tax their income which Canadians generate, they will take it out of our economy tax free.

[Renegade]

I recognize that I fund personal choices others make and I said that I fund them enough. Enough is enough. Distributing income from higher income earners to lower income earners is one of the major features of our income tax system. Anything more would bring us closer by just pooling all Canadians' incomes and then giving all Canadians the same amount. That's communism. It takes away the incentives and rewards of hard work and is harmful to the economy.

Saturn, while to a certain extent you fund personal choices others make, others are also funding personal choices that you make. As a two income household you are the beneficiary of a tiered progressive taxation system which shifts wealth to you.

Let me give you an example. You, your wife, and Bob all work for a company and make the same hourly rate. Bob puts in 70 hours a week. You and your wife put in 35 hours a week. Even though the net number of hours put in by Bob as compared to you and your wife is the same, he will contribute more in taxes because of the tiered tax system. In essence, Bob is funding a choice you and your wife have made.

[Wilber]

So the only system that would be fair to all of them would be a flat tax.

[geoffrey]

So the only system that would be fair to all of them would be a flat tax.

Flat taxes are extremely effective... no punishment for earning more. An income tax based on flat tax principles will hopefully be a first step to modernize our tax system dinosaur.

[Riverwind]

The difference between the two comes at the low and high ends of the income distribution. Multi-millionaires generally consume a small percentage of their incomes - the rest goes into savings - investment (a large portion of that goes overseas).

How many multi-millionaires are there in Canada? You could tax them all at 100% and it would have no effect on gov't revenues - however, it would certainly ensure that they do whatever they can to leave the country and take their money with them. Taxes on the middle class are the only taxes that are relevant. If you decrease consumption taxes you must increase income taxes on the middle class. This reduces the incentive to work and reduces the amount of wealth that an economy generates.

[August1991]

Bump.

[Saturn]

Mr. Turner was kind enough to post the report mentioned earlier in the other thread on income-splitting. Here it is: http://www.garth.ca/news/garth-turner-inco...ecember2006.pdf

Non-elderly couples who will benefit from income-splitting

WITH children

INCOME.....Number(in thousands).Proportion..Average tax savings

<$30K..................96......................31%..............$215

30-60K...............455.......................65%.............$369

60-90K...............733......................87%..............$900

90+K.................972.......................77%............$1,362

Total.................2,257.....................73%.............$963

Total Cost to the federal gov't $2,172 million

WITHOUT children

INCOME....Number(in thousands)....Proportion..Average tax savings

<$30K................173.......................37%.............$194

30-60K...............585.......................71%.............$412

60-90K...............760.......................86%..............$920

90+K..................831......................74%...........$1,342

Total.................2,350.....................71%.............$$889

Total Cost to the federal gov't $2,090 million

What should be noted here is that these numbers do NOT account for any behavioural changes due to income-splitting and that they are an estimate for the 2007 year.

Now if you look at the numbers, what you'd notice is that the tax savings due to income-splitting will be roughly the same for couples WITH children and couples WITHOUT children. The number of couples in both groups is roughly the same, the overall proportion of couples who will benefit is roughly the same, even in each income group. The average tax saving are also roughly the same and so it the cost to the federal treasury. Overall, the main conclusion here is that the likelihood of benefiting from income-splitting and the amount of the benefit is roughly independent of whether a couple has or does not have children.

You'll also notice that only a third of couples with under $30K in income will benefit vs roughly 80% of couples in the $60+K groups. This is of course because most of the couples in the under 30K group already benefit from almost complete income-splitting through the spousal tax credit (which will be wiped off by income-splitting).

Note too that single parents won't benefit at all, which means that close to half of all families with children won't benefit from this at all.

Now the argument in favour of income-splitting is that it will benefit families with children with lower incomes and a stay-at-home parent. The numbers though show that there is very little to support this argument. In fact, the likelihood of benefiting and the amount of the benefit appear to be almost unaffected by the presence or absence of children and the families with lowest incomes are by far least likely to benefit from income-splitting. This may seem unintuitive at first but here are a couple of explanations why the numbers differ from what many people would expect:

1) The couples with lowest incomes already benefit from income-splitting through the spousal amount, so this new form of income-splitting will replace the old one resulting in no net benefit for most of these couples.

2) The majority of the benefits will go to higher income earners as demonstrated by the numbers. These are typically workers in their prime income-earning years - the late 40s and 50s, many of whose kids have grown up and left home already.

In conclusion, only about half of families with children will benefit. Families with the lowest incomes are least likely to benefit. Families without children are more likely to benefit than families with children. Income-splitting is a tax cut that will disproportionately benefit couples with widely differing incomes, independent of the presence of children. It leaves out single-parent families, other unattached individuals, and two-income earner couples earning similar incomes, who won't benefit at all.

[jdobbin]

In conclusion, only about half of families with children will benefit. Families with the lowest incomes are least likely to benefit. Families without children are more likely to benefit than families with children. Income-splitting is a tax cut that will disproportionately benefit couples with widely differing incomes, independent of the presence of children. It leaves out single-parent families, other unattached individuals, and two-income earner couples earning similar incomes, who won't benefit at all.

I'm not liking some of the numbers I'm seeing here. Clearly there are winners and losers for income tax splitting. If there is to be a tax decrease, make it across the board.

[hiti]

Tax fairness for the rich.

Income splitting only benefits the rich and those woman who can afford to stay home while hubby works.

This is a despicable solution to poverty and families in Canada. Garth Turner should stop pimping for the rich.

[August1991]

This is a tough one and I wouldn't be so quick to jump to conclusions.

An important caveat is noted in the Parliamentary Library research posting. The calculations do not take into account changes in people's behaviour. Furthermore, this is so messy that the Parliamentary Library is not the best place to do such calculations. I'm sure Finance has better estimates.

Underneath it all, who should pay taxes? Households or individuals?

At present, property taxes fall on households but income taxes fall on individuals. (Indeed many expenses fall on households - not individuals. For example, rent, mortgage, cable, telephone and so on.)

Two points I'll venture:

If the Tories move to family tax splitting, they'll create a strong incentive for people to marry and to stay married.

There is also the political angle. How many people would benefit from this? Are they people who take an interest in politics and vote? (Most tax/subsidy policies benefit middle-income earners.)

[Saturn]

This is a tough one and I wouldn't be so quick to jump to conclusions.

An important caveat is noted in the Parliamentary Library research posting. The calculations do not take into account changes in people's behaviour. Furthermore, this is so messy that the Parliamentary Library is not the best place to do such calculations. I'm sure Finance has better estimates.

Let me assure you that SPSD/M is one of the best static microsimulation models in this country (there are fewer than a dozen of these in Canada) and it runs with the best income data available. The Department of Finance does not have a better model. Whether it was used at the Parliamentary Library or at Finance, or anywhere else, I can assure you that it produced the best static results you can produce.

The results present the minimum cost of income-splitting. Behavioural changes can only increase the cost and there is no limit on how much damage income-splitting can cause to the federal treasury.

[Saturn]

Two points I'll venture:

If the Tories move to family tax splitting, they'll create a strong incentive for people to marry and to stay married.

Or claim to be married. Is that the kind of social engineering you accuse the left of?

There is also the political angle. How many people would benefit from this? Are they people who take an interest in politics and vote? (Most tax/subsidy policies benefit middle-income earners.)

Well, it is really the political angle that's important here. It's a big vote-buying exercise.

[August1991]

I have a suspicion that family tax splitting (or whatever it's called) may figure in the upcoming federal budget. (Only a suspicion, mind you, and I figure the Tories would have to have much better projections than my suspicions or Parliamentary research).

Anyway, Coyne seems to be in favour:

Compare two couples. In Couple A, both spouses work, each earning $50,000. In Couple B, one spouse earns $100,000, the other stays home. The combined household income for each couple is the same -- $100,000 -- yet Couple B pays thousands of dollars more in tax than Couple A. Why? Because the spouse earning $100,000 pays tax at a higher rate, thanks to the progressive income tax, than either of the spouses earning $50,000. Income-splitting amounts to treating Couple B the same as Couple A. It treats like as like.

...

Is income-splitting unfair to singles? A couple earns $100,000. A single person earns $100,000. Income-splitting would benefit one but not the other. Shouldn’t they pay the same of tax? No, of course not. Horizontal equity requires that we treat like as like. But a single person and a couple aren’t in similar circumstances. The couple has $100,000 to spend between them. The single gets to spend it all on himself. He thus has more discretionary income -- the amount left over after basic living expenses -- out of which to pay his taxes. It’s only fair he pays more.

----

Consumption taxes are the type of tax that is most harmful to the economy. Consumption taxes kill consumption - the major pillar of our economy. In fact, the way consumption taxes make any economic sense is to levy them on items that are harmful and you don't want people to buy - like cigarettes. To move to a tax system that is entirely funded by consumption taxes would be like moving to a military that has only nuclear weapons. Last time I checked, harming our economy is not something that we normally strive for.

WTF? The only difference bewteen a consumption tax and an income tax is the amount saved. (If you spend all you earn, then a consumption tax and an income tax are the same.) A tax on savings amounts to a relatively larger tax on future consumption than on present consumption. People have an unnatural incentive to consume now rather than consume later. It's as if we encouraged people to buy imported goods rather than Canadian made.

This is the basic argument in favour of RRSPs, the GST or exempting CPP contributions from income tax.

[geoffrey]

Or claim to be married. Is that the kind of social engineering you accuse the left of?

Get a civil union with the roommate and save a k of taxes? Why not? Good point.

[Riverwind]

Or claim to be married. Is that the kind of social engineering you accuse the left of?

Get a civil union with the roommate and save a k of taxes? Why not? Good point.

A civil union would entitle the lesser earning one to spousal support if you break up. It is not a risk free strategy.