Good politics, lousy tax policy

Posted by ealboim under All, Election 2011, Election 2011 Campaign strategy, Election 2011 Faculty links

Elly Alboim

There’s a reason finance departments hate policies like the newly announced family income splitting promise by the Conservatives.

First of all, promising something at least five years out is a promise subject to the vagaries of events, to put it charitably. It pre-allocates spending years before fiscal pressures develop and are understood.

But there are lots of other policy issues to think about.

• Tax fairness. It creates two classes of taxpayers (not recipients, the ones tax expenditures like subsidizing hockey sticks target, though those are unfair as well). And it is much more lucrative than any of those. Currently, to be fair, seniors can split pension income, but there are compelling public policy reasons to do that.
• It is divisive: single parents, singles, and the childless are not eligible.
• It is regressive. The more you earn, the more you can transfer at the highest marginal rate. The biggest benefit accrues to the largest earners and where there is the largest income gap between spouses –by definition largely the well-off.
• It rewards those who can afford to stay home. Those who can’t get less and less depending on the income disparity
• It will be horribly complex to administer. What do you do about divorced parents sharing custody? Families with kids over and under 18? Which spouse gets the deductions?
• It will create a disincentive to work among some. For a person with a high income spouse, the attributed income is taxed at the marginal rate in that spouse’s hands..When it is assigned to the low income spouse, the income is taxed at the lowest rate. (the higher the income, the higher the marginal rate savings.) The lower the income of the recipient spouse, and the higher the income of the contributing spouse, the larger the savings. For very low current wage earners, there may well be a net gain from the tax savings versus working part time or at minimum wage. Certainly there will be a curve that shows only a marginal gain to working versus the psychic gain of staying with the kids for many people. Roughly, at highest marginal tax rate of say 43 percent (presumably this has to be followed by the provinces, otherwise you would file jointly in one jurisdiction and separately in another) the tax savings on transferring fifty thousand dollars could be over twenty thousand to the high income spouse which is offset by the tax paid by the lower income spouse (at lower tax rates.) The net tax savings diminish as the lower spouse’s work income increases.

It is a massive structural change in the tax system without consultation or discussion.

Finally, it will come at a time when the demographic crunch is hitting Canada’s health care system. Is this the fairest and best way to spend the first dollars of a surplus? Does it come out of health transfers, for instance?

Elly Alboim is an Associate Professor of Journalism and a strategic communications consultant who has worked on nine federal and two provincial budgets.