Government is all about the redistribution of wealth. Whenever government taxes anyone, whenever they spend money, they are taking wealth from some or all parts of the country and transferring it to other parts. The hard part of public policy is choosing who to benefit and who to burden.
This is why the federal government’s plan to introduce a new form of income splitting is such a problem. It is a tax cut that would primarily benefit affluent couples at the expense of everyone.
The income splitting proposal allows family members to transfer income between spouses. The benefit of this is that it can allow the family members who make more money to transfer their money to the members of the family who make less money, and thereby get a break on their taxes.
To explain how this works, think about a typical couple. Since, on average, women in Newfoundland and Labrador earn 57 per cent what men earn, and the median family income here is $70,000, we can assume that a boring old heterosexual couple will make around $43,000 and $27,000 each. Both these individuals will pay 24 per cent of their income in taxes.
Income splitting won’t help this couple. If the man transfers $2,000 of his income (the maximum allowable under the proposed plan), the woman would still have to pay tax on that, so the couple’s total tax burden would remain the same, just transferred from one member to the other.
In order for income splitting to matter, a couple has to be right on the cusp of a different tax bracket or have wildly different incomes. Let’s make this couple a little better off, and switch the gender roles just for fun. Say she makes $44,000 and he makes $30,000. She’s now being taxed at 35 per cent, while he’s being taxed at 24 per cent (since $43,561 is the threshold for the 35 per cent tax rate in Newfoundland and Labrador). For this couple, income splitting would be good. It would put her income under the 35 per cent threshold without raising his above it. As such, she’d be about 11 per cent better off with only a small cost to his taxes outweighing it.
What’s key to note is that even this family is above the median for Newfoundland and Labrador families. By the time you’ve got a family with two working adults who make over 70,000, you’re already in the top half of Newfoundlanders. If this is you, Mazel Tov. But this also means you’re not the ones most in need of a tax break, and you’re probably better off with improved social programs like full-day kindergarten or universal day care than you would be with a small tax break.
The folks who really benefit from income splitting are those with a wide disparity between the incomes of the two spouses. If a lawyer marries his secretary, for instance, or a doctor marries her nurse, they might benefit from this. A marriage of equals, however affluent, doesn’t particularly benefit from this arrangement.
Those who benefit most are families with one breadwinner and one stay at home parent. I’ve got nothing against stay at home parents, but I’d prefer to subsidize that lifestyle in a way that applied to everyone, and not just to wealthy people. If the government were offering improved maternity benefits, a baby bonus, or more generous paid leave provisions, that would be fair, as that would help those who most need it, not those who don’t really need the help.
What this means is that the government is rewarding people who are in unequal marriages, or people who are affluent enough that one or another of them can afford not to work outside the home at all. The government has chosen to give money to those who least need it instead of putting it in other places where it could be much more useful. They’re taking from all of us, and giving our money to old white men.
I for one think 35 per cent of my income could be put to better use.
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