Income-splitting will benefit more families than the NDP's daycare proposal, Andrew Coyne writes Photo: CHRIS YOUNG/The Canadian Press files The weak argument against income-splitting is the one you hear most often: that the benefits go “mostly to the better off.” Progressivity — the idea that those who earn more should pay a higher share of their income in tax — is certainly a desirable quality in any system of taxes and transfers. But it’s not the only one. Past a certain point, it can even be a defect.
And so far as progressivity is an objective, it applies to the system as a whole — not necessarily to each and every component part, or every single change. A measure that addresses other objectives, such as efficiency, but fails the progressivity test can always be offset by changes elsewhere in the system. For example, the GST, an efficient but regressive tax, was accompanied by tax credits for the poor that more than made up for any extra costs of the tax.
Likewise, taken as a whole, the package of changes the government has introduced, including not only income-splitting but also increases in the Universal Child Care Benefit and the Child Care Expense Deduction, nets out on the progressive side: the largest benefits, proportionate to income, go to the families with the lowest incomes.
So while it is true that income-splitting — allowing the higher-earning spouse in a couple to share income with the other for tax purposes — disproportionately benefits those on higher incomes, that is not all there is to be said about it. Nor does it invalidate the central argument in its favour: that it corrects a serious inequity, whereby two families with the same incomes pay wildly different amounts in taxes, depending on whether the income is earned primarily by one spouse or shared more equally between the two. A family in which one spouse earns, say, $100,000 will pay thousands more in tax than a family with two spouses earning $50,000 each. This violates a fundamental principle of tax fairness: that “like should be treated as like.”
The stronger argument against income-splitting, then, tackles this point head on: they’re not alike. They may have similar incomes, but they’re not in similar circumstances, since the non-working spouse in the one-income family has more “free” hours to take care of the housework (or, for a fortunate few, to take the time in leisure).
As economist Kevin Milligan has pointed out, “a stay-at-home spouse is a household manager. She or he handles cooking, cleaning, laundry, bill-paying, household repairs and maintenance, child sports and activities. … If the household manager is perceived to have any value at all, the simple $100,000/$0 comparison to $50,000/$50,000 breaks down.”
In other words, if the uncompensated services of the “household manager” are included, the two families in fact have different incomes, and should pay different levels of tax.
That’s true as far as it goes, but it doesn’t settle the argument quite as neatly as Milligan suggests. For starters, it’s not obvious that including the work of the “household manager” invalidates the comparison. It’s not whether it “has any value at all,” but whether it has enough value to justify the differences in tax burdens. Bear in mind, it’s the net value that counts, not the gross. One way or another, the cooking gets done, the house gets repaired, the kids get driven to hockey, whether in one-income or two-income households. It’s only to the extent that the one-earner, one-at-home arrangement is more efficient — resulting in a higher total value of household services — that the tax advantage enjoyed by the two-income family is mitigated.
Well, now. How do we measure that value? In hours worked? But some work more efficiently than others. In how much such work would be compensated on the market? But some is of higher quality than others. What sort of household work should be included? How should it be defined? As I suggested in an earlier column, it is a conceptual swamp.
It isn’t only single-income families that are discriminated against, moreover: it’s any family where the spouses have sharply unequal earnings. A family where the income is split 80-20 still pays more in tax than a 50-50 family, yet without the benefits of a full-time “household manager.”
For that matter, one person may make the same income as another, but in many fewer hours worked per week — leaving him with more free hours, whether for leisure or housework. Shouldn’t that be taken into account? Or he may derive more pleasure from his work, what economists call “psychic income.” What about adding that into the mix?
Money income may be a crude measure of ability to pay, but at least it measures what it measures. If we really want to take hours worked and other quality-of-life concerns into account, we’re obliged to inquire a lot further afield than just the division of household labour.
The more difficult question for income-splitting proponents is this: Is this the worst inequity to be found in the tax system? Is fixing it the highest priority use we can make of scarce public funds? I don’t know the answer to that. But what would the critics propose as a higher priority? What would they say was a worse inequity?
Let’s try a thought experiment. Suppose, rather than being skewed in favour of two-income households, the tax system had the reverse defect. Suppose it, in effect, penalized women for working outside the home, to the tune of thousands of dollars, in the same way that it now penalizes them for staying at home. I suspect that inequity would top the priority list in a hurry.
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