Angry in the Great White North

Finance Minister Jim Flaherty is about to introduce a scheme of income splitting:

The Conservative government is looking at a radical restructuring of the tax system that would allow couples to reduce what they pay by averaging out their income, says a government source.

Of course, this is a bad thing to many people:

But introducing income splitting - something Finance Minister Jim Flaherty could touch on as early as Thursday when he delivers his annual economic update - is likely to set off sharp criticism from groups that consider it unfair to single Canadians and a disincentive to women working outside the home.

Critics say income splitting - transferring income to the lower-earning partner for tax purposes - would alter the fundamental nature of the tax system, making the family a basic unit and the system less progressive.

First of all, how is it unfair to single Canadians? Their taxes remain unchanged. Why is it that a benefit to one group is considered unfair unless it is extended to all groups, even if it doesn't apply to those other groups?

Is it unfair that I didn't receive any compensation for Japanese internment? I mean, sure, I'm not Japanese, nor was I interned, nor was I even alive when it happened, but hey, somebody else is getting some money, so where is mine?!

If single people want to gain the benefit of tax splitting, then stop being single. And then enjoy tax splitting, while at the same time lamenting all the things you have lost in the deal when you agree to share your life with someone else, and all the compromises that come with it.

But enough of that. I'd be curious to know if the people complaining are single themselves, or if they are simply arguing on behalf of single people who have not elected these people to speak on their behalf.

Actually, I'd like to know exactly who these unnamed critics are. They are not named by the Toronto Star. Opposition MPs? Economists? Advocates for the poor? Advocates for the rich?

Unnamed women's advocates are quoted -- sort of. They are quoted from the future:

But it would attract fierce criticism from singles who would feel disadvantaged by income splitting and by women's advocates who argue, by easing the tax burden for families with a stay-at-home spouse, it would tend to discourage women from joining the workforce.

No, lower taxes means that a family would not feel compelled to make two incomes and hand the child-rearing over to other. By that logic, we ought to raise taxes to the point at which no one could afford to stay at home, and so maximize the number of women in the workforce.

Of course, this make sense to advocates. The more women working in miserable conditions, the more their advocacy is required. Make it easy for women to choose to stay at home with their children, and these childless and unloved women's advocates will see their influence wane.

Got that? According to the Toronto Star, these women's advocates are advocating less take-home pay in order to force women into the workforce in order to make money any way they can in order to survive.

Note the tense: "it would attract fierce criticism". Says who? Have these advocates made any statements yet? Or is the Toronto Star assuming what the reaction would be next week. That's not news, that prognostication.

Let's leave the Star's psychic powers aside for the moment and just assume that there will be critics and that they will make the "progressive" argument foretold by the paper.

We don't know the details of the program, so I'm going to speculate and say that you can split your income evenly with your spouse, and then again with your children, but each child is worth only a half share. So a married childless couple can split the income two ways, a married couple with two children can split it three ways, and a married couple with four children can split it four ways.

Let's now suppose three situations. In each only one spouse is making an income, and the other is raising the children full-time. I know this comes as a shock to progressives, who still lament the passing of government-run universal daycare. But for better or for worse, we don't have government-run indoctrination camps for toddlers. So in our bizarre family unit with an unqualified parent raising children instead of a government-paid bureaucrat with a degree in child-rearing, let's further look at three families that make $40,000, $80,000, and $200,000 per year, respectively.

How would the income splitting affect these families?

Using the government's own program for tax calculation, and ignoring provincial taxes, we know that a person making $40,000 a year has to pay $4,583 in federal taxes at the end of the year. However, if you split that income two ways, each share is charged $1,491 in taxes, or a combined total of $2,982. With two kids, the $40,000 gets split three ways, and each portion pays only $537 in taxes, or a total of $1,611 a year. With four kids, it's like four people making $10,000 each. At that level, you pay $56 a year for each contribution, or a total of $224 in taxes.

Wow!

What about the single-income family making $80,000. Going through the same calculations, the current tax hit is $13,822 a year for the married couple, no income splitting. Add income splitting, and the tax hit drops to $9,168 a year. Add two kids, and the family pays $7,355 a year. Add a pair of surprise twins, and the family tax bill goes to $5,694.

And the high-priced executive pulling in $200,000 a year? Currently, married and no income splitting, the family coughs up $47,351 in cash to the taxman. Split the income with the spouse, and the tax drops to $37,864. Two kids and the slice of the pie that goes to Ottawa shrinks to $31,477. Spawn a couple of more heirs to the family fortune, and the family pays $27,144 a year in taxes.

(Note: My numbers differ slightly from the ones the newspaper reported, as provided by the Canadian Taxpayers Federation. The difference is very minor, and it gives me the confidence to extend the calculation to income brackets not covered by the article.)

So what do all these numbers mean?

Look at it this way. If you are making $40,000 a year, and you split with your spouse, your taxes drop by 35%. Two kids, and the taxes drop by 65% from the original tax bill. Four kids, and the tax bill is slashed by 95%!

But if you make $80,000, the effect is less dramatic. Splitting with your spouse drops the taxes by 34%. Two kids takes lowers the taxes by 47%. Four kids and you save 57% in taxes.

If you are raking in $200,000, then the splitting saves you 20%, while two kids 34%, and four kids 43%.

So under this formula, which may not be the one that Jim Flaherty is allegedly going to present, the wealthier you are, the less impressive the impact. Of course this is true. Income splitting is layered on top of a progressive tax structure, so it tends to magnify the effects of a progressive tax scheme.

I don't know why these critics are complaining. It sounds like a great idea for Canadians who are on the lower end of the income scale.

But then there is that $5 billion hit to the treasury. Of course, the federal surplus is $13 billion, so you just know that someone is going to argue that the money is not needed by the government and should be returned to Canadians. Less money for government? But what of those government programs? We need those, and we should be creating more of them. Even if it means forcing the guy trying to raise four kids on $40,000 a year to pay the full $4,583 in taxes, instead of giving him the chance to pay a mere $224. That's $363 a month for groceries handed over to the government.

That $363 in groceries -- the milk, the bread, the vegetables, the juice boxes, the treats, the diapers for the little ones -- is the price these critics will want these families to pay for "progressiveness".

Ironically, given the muted effect income splitting is likely to have on the take-home pay of Canada's wealthiest citizens, it is more likely that these self-styled defenders of social progressiveness will find their greatest support among the ranks of the rich. You just know that's going to be a bitter pill to swallow for Canada's left.