Budget Talk

[jdobbin]

http://ca.news.yahoo.com/s/capress/070130/...ncome_splitting

MPs inside and outside the Conservative party are urging Prime Minister Stephen Harper to lower taxes in his upcoming budget by allowing couples to combine their incomes and divide the tax load.

But some experts say income-splitting could blow a hole in the country's finances.

"It's known to be counter-productive to any responsible fiscal program," says Kathleen Lahey, a law professor and tax policy specialist at Queen's University.

"Most countries that have ever had any form of income-splitting . . . have been abolishing it or reducing it as quickly as they can because it's just too expensive," she said in an interview.

This has been my primary concern over income splitting. Will it be too expensive for the treasury. Will it preclude other fairer tax decreases?

I'd really prefer a simple income tax cut. Don't make it possible for deficit spending to start all over again.

[Ricki Bobbi]

Agreed.

Now is definitely not the right time for income-splitting.

Maybe when the economy cools off and we are looking at ways to move people out of the workforce.

But for now, no way.

[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.

[Remiel]

Another way to look at it is as a tax on couples who earn close to the same amount of money. They are going to start subsidizing people with differing incomes. And for what reason? I saw a similar report to Saturn's in the paper the other day (can't remember if it was the Star or the Post, I was at the library). There were far more families that were going to benefit in the high bracket than the low, by quite a bit.

Of course, if I am reading this right, there is a maximum amount of money you can save, even if you are filthy rich and have only one income earner.

Using the 2006 income rax rates (what is the basic exemtion at? ~$8000, right? For some reason the web page I'm looking at doesn't show it).

A single income family making $236,570 pays roughly $58500. Under income splitting, they would pay about $50800, a saving of ~$7700, if my calculations are correct. That would be the absolute maximum that could be saved, I think.

Something that came up while I was looking up the figures for this... Is it true that income tax brackets are only indexed to the amount of inflation exceeding 3% (which apparently it hasn't since 1992)? If so, that is bloody criminal! If someone really wants to give Canadians a break, they should reindex it fully to inflation. If it were affordable, I'd even propose increasing the brackets to what they should of been had it been indexed all along. I'm by no means an enemy taxation, but this really strikes me as underhanded and unfair. A secret tax increase that hits you every year.

[White Doors]

Yes enough of this smoke and mirrors. Increase the index of the rates and decrese the amount already. Also increasing the tax free amount would help too. 1% reduction on all the rates. Maybe 2% off the lowest bracket and up the exemption to 10k already.

Cripes, income taxes in the country are criminal. Come on Harper, this is why you were voted in!

[Who's Doing What?]

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.

This is just like the GST cut. The CPC trys to pass it off as "something for the little guy", when in reality when the numbers are run, it is the wealthy who benifit the most.

As White Doors so correctly put it "enough of this smoke and mirrors."

[Saturn]

This is just like the GST cut. The CPC trys to pass it off as "something for the little guy", when in reality when the numbers are run, it is the wealthy who benifit the most.

As White Doors so correctly put it "enough of this smoke and mirrors."

Income-splitting is similar to the GST in that the government tried to pass it off as something for the little guy when the wealthy benefit the most, but it differs from the GST cut in three major aspects.

1) The argument here is that it is a tax cut for families with children, when in fact families with children are less likely to benefit from it than families without children.

2) The GST cut provided some benefit for roughly 90% of Canadians (maybe even more). Income-splitting will cost the same or more but it will target maybe a quarter of Canadians, namely couples who earn widely differing incomes.

3) The cost of the GST cut can be well estimated and a 1% GST cut is unlikely to change behaviours significantly. Hence, the cost of such a cut is unlikely to surprise and come well above expectations. Income-splitting on the other hand can result in much higher costs than optimistic Flaherty would expect. Income-splitting can result in some very large benefits, hence it has a lot of potential to cause significant changes in behaviour. It is therefore very difficult to put a limit on the cost of income-splitting.

My feeling on this is that if you want to give parents more money for childcare, you should do just that - target parents with younger children through the UCCB or CTB. If you want a general tax cut, you should do it across the board. Giving a quarter of Canadians a significant tax cut and claiming that it it has something to do with childcare when having children doesn't make a parent more likely to benefit or to benefit more than couples without children....well, that just harpercritical.

[Saturn]

Is it true that income tax brackets are only indexed to the amount of inflation exceeding 3% (which apparently it hasn't since 1992)?

No, tax brackets and most benefits are currently indexed with inflation. However, they were not indexed between 1992 and roughly 2000. There was significant bracket creep during that period and taxpayers were hit by a new tax every year but the government was also hit with the huge task of turning the finance of this country around (from near bankruptsy) and they used the bracket creep as another way to help them fix their finances. Now they also eliminated the surtax for high-income earners well before they started indexing the tax brackets but that's a whole other topic.

[jdobbin]

CP is reporting there won't be income splitting in the budget.

http://ca.news.yahoo.com/s/capress/070201/...fedbudget_taxes

[Ricki Bobbi]

Smart move by the Conservatives.

A two point cut on the lowest bracket and one on all the others is the best choice...

[gc1765]

A two point cut on the lowest bracket and one on all the others is the best choice...

That would be nice. Do you think that is what they will do?

[Ricki Bobbi]

That would be nice. Do you think that is what they will do?

My guess is you will definitely see at least a one-point cut in the lowest bracket. Raising it was a mistake.

Either another point across the board or a second GST cut.

Smaller things like raising RRSP contribution limits, raising the Home Buyer's Plan to $50K....

[August1991]

My guess is you will definitely see at least a one-point cut in the lowest bracket. Raising it was a mistake.

Either another point across the board or a second GST cut.

Another 1% cut in the GST would cost about $5 billion and they only promised to do it during their first mandate. For credibility though, they might do it in this budget. Harper's a kind of shock-and-awe type.

I agree with you Ricki about re-instating that crazy half point raise, half way through the year. It was a mistake and one they should undo.

I have always favoured an increase in the basic deduction because it means fewer people pay tax but it isn't as fair to the poor as a cut in the lowest rate.

There was significant bracket creep during that period and taxpayers were hit by a new tax every year but the government was also hit with the huge task of turning the finance of this country around (from near bankruptsy) and they used the bracket creep as another way to help them fix their finances.

The federal government was absolutely nowhere near bankruptcy in the mid-1990s.

[Ricki Bobbi]

Another 1% cut in the GST would cost about $5 billion and they only promised to do it during their first mandate. For credibility though, they might do it in this budget. Harper's a kind of shock-and-awe type.

I agree with you Ricki about re-instating that crazy half point raise, half way through the year. It was a mistake and one they should undo.

I have always favoured an increase in the basic deduction because it means fewer people pay tax but it isn't as fair to the poor as a cut in the lowest rate.

You are right about Harper being a shock and awe guy.

While the GST cut would make some headlines it wouldn't be big news?

What is something that would really make people go wow?

Something that *might* force an election?

A big raise to the basic personal exemption is unikely as it would be accepted across the board...

[geoffrey]

Saw a report on GlobalTV on the 11:00 news, apparently they are dropping tax splitting. The CPC is running out of trial balloons, eventually they'll have to come up with a policy.

[Ricki Bobbi]

Saw a report on GlobalTV on the 11:00 news, apparently they are dropping tax splitting. The CPC is running out of trial balloons, eventually they'll have to come up with a policy.

What a profound statement Geoff.

No sh*t eventually they'll have to come up with a policy ... like when they present the budget.

Maybe the trial balloons are just a way of keeping the angry types angrier that much longer.

[jdobbin]

Flaherty is saying he hasn't ruled out income splitting for everyone.

http://www.ctv.ca/servlet/ArticleNews/stor...09?hub=Politics

I certainly hope he doesn't do this. It really is too expensive and is tax other nations have tried and moved away from. It is not the best tax cut to make.

[geoffrey]

It's not a great decision in the big scheme of things, there are much better ways to cut taxes.

But it's a huge cut to the conservative base's taxes, so that's good. Their primary target is suburban families, the ones that care about taxes, about team sports, about protecting their kids from drugs and crime. That's what they are going for. Most of these families would surely vote CPC if their tax bill dropped a few thousand.

Either way, Flaherty needs to make a decision quick. Some constructive criticism to the CPC; the trial balloon, then statement, then another balloon, then statement to the contrary, then another balloon makes it look like the government honestly has no freakin idea what they are doing.

Make a choice Jim, and be done with it. His dithering on the issue is making me sick to my stomach.

[jdobbin]

More talk on income splitting.

I think we had a talk about this earlier how it might change behaviours. This economist sees dangers for women who unplug from the workforce.

Some people think the change would encourage marriage. I don't think that is a wise use of the tax law if that is the intent. Individual taypayers need to be addressed rather than thinking solely of family units.

http://www.cbc.ca/canada/british-columbia/...come-split.html

[geoffrey]

I'm in agreement Dobbin, as a tax policy, this one sucks. As an election winner, this might have some success.

Another key example when politics over policy has won out in this government.

[Saturn]

More talk on income splitting.

I think we had a talk about this earlier how it might change behaviours. This economist sees dangers for women who unplug from the workforce.

Some people think the change would encourage marriage. I don't think that is a wise use of the tax law if that is the intent. Individual taypayers need to be addressed rather than thinking solely of family units.

http://www.cbc.ca/canada/british-columbia/...come-split.html

Fully agree with the professor's analysis.

The intent here is social engineering of the worst kind, which the right-wing typically accuses the left of. It will definitely encourage many to stay home making families far more vulnerable to the loss of the single breadwinner, encouraging women and children to stay with an abusive partner even in life-threatening situations (as if spousal abuse is not a serious problem already), it will put more families at risk for low income (one-income families are far more prone to poverty than dual-income families). On the economic side, it will lower the participation rate and increase labour shortages which are already a problem in many areas of the country and will only get worse as babyboomers start to retire in massive numbers. It also has the potential to put a massive hole in the federal and provincial budgets (the provinces will have no choice but to follow). Any way you look at it, it is a socially and economically destructive policy. The only beneficiaries here will be people in very stable relationships with very healthy spouses earning high income in secure positions, who wouldn't want/need to work anyway (and currently don't) and religious fanatics who believe that society is better off with more poor families, more bad abusive marriages, more poor widows/widowers and a bad economy.

[HistoryBuff44]

Personally, i wish they wouldnt cut taxes and just keep throwing large surpluses at the debt. the money saved on debt servicing costs will come in handy in 10-15 years when the baby boomers are retiring.

[Riverwind]

It's not a great decision in the big scheme of things, there are much better ways to cut taxes.

The current system discriminates against single income families because families with the same income pay more taxes than dual income families. They should either treat everyone as individuals when it comes to paying taxes and collecting benefits or treat everyone as families. The mish mash that they have now simply maximizes taxes for the gov't and minimizes the costs of benefits.

Personally, I think it is absurd to allow a dual income family to deduct the cost of childcare but, at the same time, prevent a working spouse from paying the non-working spouse to provide the same service. We don't need to have complete income splitting - simplying allowing single income spouses to claim the $7000/year childcare deduction would be a big help.

[geoffrey]

... simplying allowing single income spouses to claim the $7000/year childcare deduction would be a big help.

I strongly agree with this, but full income splitting may have some negative outcomes. I really haven't crunched the numbers much, but there are some serious negative implications possible.

Especially in a labour shortage economy.

[Riverwind]

The only beneficiaries here will be people in very stable relationships with very healthy spouses earning high income in secure positions, who wouldn't want/need to work anyway

There are many families that have much more flexible work arrangements. For example, many have a jobs which do not require a 40 hours/week. Providing a tax deduction would all these families to choose to work fewer hours in order to better care for their kids. We need policies in this country to encourage the middle class majority to take care of their own kids instead of demanding gov't subsidized daycare.