Income Splitting and the “Fairness Critique”

The federal government recently tabled its 2014 budget projections, claiming a slight surplus of $2 billion in 2015. With this is mind, discussion has arisen around what to do with the extra money. Should Ottawa pay down the national debt? Should it increase program spending? What about reducing taxes?

One campaign idea from the Conservative Party is income splitting. Essentially, a couple living together could “average out” their combined incomes for tax purposes, pushing the higher earner into a lower tax bracket. The Conservatives are selling this policy as “easing the tax burden on Canadian families,” which would presumably be picked up by someone else.

While I generally favor lowering most taxes, much of the time, and for almost any reason, we must ask the question that continually surfaces in economics: As opposed to what? In the case of income splitting, what alternative is the government foregoing?

First, debt payments should be seriously considered. One other option is to trim tax rates equally across the board by a small amount. This would address the main criticism of income splitting, which is that it favours “families” (or couples) at the expense of individuals who do not find themselves in two-person households. Indeed, it is unclear whether income splitting is a subtle nudge from social conservatives trying to support the idea of the so-called traditional family.

The “fairness” critique of income splitting extends much further. Not only may there not be a reason to favour certain social arrangements in this way, but also “families” seem to use a larger chunk of public spending–recreational facilities, healthcare and education costs for children, and the like. Critics claim that it would be unfair to reduce the tax burden selectively on that group of people who use the most public services.

For the reasons above, income splitting has generated a rift among Conservatives and among fiscal conservatives, more specifically–the controversy surrounds whether selective tax cuts for a specific group is fair or not.

Another problem is framing the surplus as a prize. It might be useful to remember that it is not, in fact, the government’s money in the first place. In this light, however, it is hard to disentangle the various interest groups that may find themselves scrambling for a piece of the surplus.

Nevertheless, it will be interesting to see whether the Conservative Party moves forward with income splitting in light of the fast-approaching election in 2015. To do so would appeal to their socially conservative base, in addition to fulfilling a campaign promise. However, enacting a broader tax cut would support the kind of “big tent conservatism” that seems to have held together an unpopular government through the last four elections.

Michael Craig is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

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