Thursday, November 6, 2014

Income Splitting

Economist Kevin Milligan's take on income splitting.  Source.

Income splitting has been in the news lately, as happens with a lot of things I blog about.  The last time the Harper Conservatives were elected, a promise was made that as soon as the budged had been balanced, income splitting would be introduced for tax relief purposes.  For a campaign promise made almost four years ago, this is certainly stirring up a lot of controversy.

So for those of you wondering, income splitting has to do with taxes and tax brackets.  The more money you make, the higher a percentage of your income the government collects in taxes.  Now, in families with two working parents making different amounts of money, up to $50,000 was promised to be allowed to be "shared," or "given" to the lower-earning partner to lower the tax  burden on the higher-taxed partner.

In response to this promise, the graph at the top of the page was created.  Kevin Milligan, an economist I follow on twitter, proceeded to work out the tax savings based on primary earner v. secondary earner income.  As you'll no doubt notice, it pays off very well for those with one very high earner and one low earner (though the benefit is capped at $2000, but my understanding is that the details weren't widely known when Milligan first released the graphic).  That's the problem that a lot of economists and policy makers have with this plan.

His comments were measured and diplomatic, but set off a huge debate.  Source - CTV News.

As dutifully as he towed the Tory flag, Jim Flaherty himself mere months before he died started to publicly criticise this plan.  This is likely due to the fact that less a politician and more a public servant, in my opinion.  The source attached to that interview references a study out of the CD Howe institute which found that roughly 85% of Canadians would see no benefit whatsoever.  In fact, though I cannot remember quite who said it (though it sounds like something @MikePMoffat would post), an economist's tweet shortly after the scheme was announced went something along the lines of "It seems like the only people benefiting from income splitting will be university professors.  I'm hearing a lot of 'Oh yeah, it helps almost nobody but I'm going to save a BUNCH of money on my taxes!'"

Now, this income-splitting scheme only benefits 15% of Canadians, but that could be relatively harmless if we're hoping to lower the tax burden on the stereotypical nuclear family.  However, the reason that this plan ruffles so many feathers is that the price tag is pegged at about $2.5 billion.  Billion with a B.  To quote Rick Mercer, that's a lotta poutine.  And given that the Canadian federal government's expenditures in 2011-12 were roughly $217 billion, this would represent over 1% of the budget.  This also represents almost the entirety of the projected budget surplus, and it's a lot to transfer to already wealthier families.

Finally, the first cheque is slated to hit Canadian families next July, just before the next election.  This has been pointed out by almost all the analysts I've listened to, and it certainly seems politically convenient to say the least.


Edit: The benefit is capped at $2000, thanks, Mike!