The newly elected Canadian Liberal government announced in their election platform that they would end Income Tax Splitting for Canadians.
For those not familiar, Household Income Tax Splitting was made available to Canadians in 2014 with the Conservative Government’s Family Tax Cut. The tax measure allowed couples - but only with children under 18 - to notionally transfer up to $50,000 of the higher-income spouses income to the lower-income spouse, with a cap that this would reduce the couple’s federal tax bill by a maximum of $2,000.
When Income Splitting was first brought in, a lot of excellent economic analysis was undertaken by Think Tanks, economic researchers, and by the Parliamentary Budget Office. One thing I found missing from this previous work was any kind of Data Viz that could show, for varying household income combinations, what the tax savings from Income Splitting would be. Once income splitting is eliminated, the question can also be framed as how much will households federal income taxes increase by.
I've crunched the numbers and made a nifty Highlight Table in Tableau to show the results.
The following graph has a little explaining to do. The vertical and horizontal axis represents the taxable income of each earner for a given household (up to $200,000). Pick taxable income combinations for each member of a household, and where they met up on the graph is the expected federal tax savings from income splitting. White boxes mean no savings from Income Splitting, grey (*ahem…) boxes are some savings, and black boxes are the capped max federal income tax savings of $2,000.
A few points of interest noticeable from this table are:
The Rationale for Income Splitting
The policy logic for Income Splitting is that households in the same fiscal situation should be taxed at the same rate. Without income splitting, households where all the income is earned by one person face a higher income tax bill than a household that earns that same combined income equally among earners. For example, a household where both partners make $50k gross income each would owe a combined $12,344 in federal taxes (for the 2015 tax year). Another household with the same household income, but where one earns $80k and the other $20k, would owe $14,073 in federal taxes. (Jack Mintz from School of Public Policy has an excellent research paper on the subject).
Criticism and Support of the Policy
The more I've thought Income Splitting as a general principle, the more I’ve come around to the merits of it, with conditions. Simply put, it does seem unfair that households pay higher taxes than others who face the same combined income, just because the income is earned more by one person.
That’s being theoretical about it, but what have been the broader consequences of applying Income Splitting for Canada’s situation? Here, the two main criticisms have been that the benefits mostly go to middle and high income households, and that is an expensive tax program ($2.2 billion for the 2015 tax year).
My armchair Economist response to this criticism is that even if all the benefits went to the wealthy, rich people are people too, and it’s sensible to enact policy that reduces situations where some rich households are taxed more favourably than others. Income Splitting is an expensive tax program, no doubt about that, and Moonlit Economic's conditions for Income Splitting (yes, that'll be a thing now) would be that:
(1) it needs to be paid for with tax revenues elsewhere, and
(2) these increased tax revenues should be spread across income levels depending upon which income levels benefit the most from Income Splitting.
Income Splitting favours the rich? Just make them pay for it then. This can be as simple – I’m still sitting in my chair, mind you – as bumping up the higher tax brackets up by whatever is required to make up for the lost tax revenue.