It's Fair to Share - reducing taxes in Canada by sharing income

Assumptions and Misunderstandings about Income Splitting
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Executive Summary

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If you wish to attend the conference contact
Sara Landriault at
landriault@ripnet.com
or Beverley Smith at
bevgsmith@alumni.ucalgary.ca


Smith argues that basing taxation income solely on individual earning patterns, and not permitting declaration admitting income is shared, is inconsistent with other laws, fails to recognize the contributions of the unpaid sector of an economy, causes undue hardship and is a violation of Charter rights about freedom of conscience and about equal benefit under the law.







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Current situation



Canada bases its taxes on the income of the individual only. There is no option to declare that your income is shared with or spread over other people and to have a different tax rate based on the sharing of income. Other nations permit the second category of taxation for those who do share income.







At the heart of the discussion is really what the value is of having an adult who is not paid, a nonsalaried citizen, and whether that role is of value and if it is of value, to whom it is of value. The penalty on the single income lifestyle assumes the role is of little value and that the nonearner is notworking, and is only a dependent on the earner.







Therefore the issue about the single income tax penalty is closely linked to advocacy to recognize unpaid labor as a vital part of an economy, and to the womens rights movement to recognize that caregiving work at home, a historical female role, has always had great value to the nation. This therefore though on the face of it a tax issue, is also a human rights issue and a womens rights issue.







1970 The Royal Commission on the Status of Women said that taking care of a child at home was also work. IT said these services have an economic value, even though they are not included in the estimates of the Gross National Product, because they cannot yet be adequately measured. The housewife who remains at home is just as much a producer of goods and services as the paid worker.







Nov 2005 Globe and Mail reports that on a household income of $40,000, the dual earner couples pays $2444 tax while the single earner pays $4529



On $60,000 income the dual pays $2015 while the single pays $8915



On $75,000 income the dual pays $5365 while the single pays $12,317



On $100,000 income the dual pays $11,064 while the single pays $18,817



The single income family pays taxes 4278% higher.







Oct 2004 Kurt Oelschlagel, CA of BDO Dunwoody has found that for households earning $61,416.37, the equal earning spouse arrangement of $30,528 each approximately pays tax of $6524 while the arrangement where one spouse earns $55,000 while the other earns $5,000 pays about $9547 tax, 46% higher.







April 2004 Niels Velduis, economist has found that for households earning $40,000 the single income household pays a penalty of $4973 more tax than does the dual earner household.







2002 Heather GoreHickman, CA, has calculated that for BC households earning $60,000 the household earning $30,000 and $30,00 pays $9053 in tax,



The household earning $36,000 and $24,000 pays $10,212 in tax.



The household earning $50,000 and $10,000 pays $11.601 in tax



The household earning $60,000 and zero pays $12,849 in tax.



The single income family at the bottom pays a penalty of 42% higher tax rate on the household with the same total income that happens to have two earners of equal salary.



Many feel this unequal taxation violates a principle of horizontal equity, whereby those with the same ability to pay tax should pay the same tax.







1992 Dr. Chris Gerard in The Taxpayer notes that for households earning $60,000, the common law dual income family pays $7580 tax, the dual income married couple pays $10,725 tax and the single income married couple pays $17,824 tax







1990 The Fraser Institute in Tax Facts Seven notes that all dual income families pay less tax than equalearning single income families and that the largest differences appear to be at the lowest income levels. On a household income of $15,000, the single income family pays double the tax of the dual earner household.







The nonearning spouse currently is recognized in tax law only as a dependent of the earner and the deduction federally is less than that of a general personal deduction, the assumption possibly being that the lower income spouse has no or fewer expenses than any other full person. These assumptions have been questioned by womens rights advocates.







For nonearning spouses or those of low income, there is a deduction permitted for them as spousal dependents’. This spousal deduction was created in 1918. In the 1950s it was $1000 when an average income was $3,000 so it was about onethird of an average income. It rose with the cost of living and in 1987 was $3666. In 1988 it was converted to a nonrefundable credit. The actual value of this deduction was reduced at the same time. In 1993 the value was $915 for federal taxes or $1418 for federal and provincial.



By 2005 it was less than oneseventh of an average income, considerably lower than the minimum wage and there are some commentators, such as Dr. Kathleen Lahey of Queens, who are suggesting it be reduced to zero to provide incentives for women to work outside the home.







Other observations



Single earner lifestyles are less common than dual earner.



In 1999 60.5% of husbandwife families were dual earner and 22.7% were single earner.







Single earner lifestyles are the lower earning style.



1995 single earner earn $58,085 while dual earner homes earn $68,347



contrary to the myth that the single earner household is the wealthy one.



Assumptions of individual based tax only

1. that the goal of tax should be to encourage each adult works/ contributes/ is useful/ is not lazy

2. that the only kind of work that matters is paid work. That there is no such thing as unpaid work. Unpaid tasks must be leisure, personal or selfindulgent, even
indulgences of selfishness and not serving society male dominated traditional definition of work, productivity and GDP, ignoring unpaid labor

1970 –The Royal Commission on the Status of Women said that taking care of a child at home was also work. IT said these services ‘have an economic value, even though they are not included in the estimates of the Gross National Product, because they cannot yet be adequately measured. The housewife who remains at home is just as much a producer of goods and services as the paid worker.

3. that the goal of tax should be to encourage people to be independent
and not dependent on another a moral principle against laziness – Christian work ethic

4. that being dependent financially is the same as being dependent morally
The financial definition of definition of dependency is assumed when in fact
In practical terms the earner depends on the athome spouse for domestic
Roles, caregiving of the family, maintenance of the home and of family connections in the larger community. The child depends on the protection, feeding and nurturing of the unpaid worker in order to survive. The community also depends on the unpaid worker as a backup for the paid work force, to care for the sick, to do volunteer work, to read to the young and drive cancer patients to appointments and care For the elderly and dying. The tax system actually also depends on the unpaid Caregiver to work for free yet still to provide healthy young adults for the Next generation of paid workers. So even though the earner, the young, the community and the tax system depend on the unpaid worker at home, she is viewed as the one who is dependant
even though the couple may feel they are equal partners and even though
the caregiver of young children at home is there to feed and protect them and is herself a person on whom young lives depend

5. that being dependent morally is repugnant for any liberated woman and there is no such thing as interdependency

6. that being dependent financially is risky since it makes the person vulnerable
and makes them feel less stable and less fully equal

7. that financial dependence is a decision made personally and one the state does not impose in fact the state imposes it on purpose, penalizing the unpaid worker to force her into dependency financially. The financial dependency is one the state imposess not a consequence the unpaid worker seeks out, to be lazy
8. That the state should nudge people into roles of complete financial independence and should not permit or recognize incomesharing even if the couple does it and believes in it. That the state does this for the couples own good . That the state should take sides in a moral lifestyle debate and favor some choices over others. in fact basic tax code principle is supposed to be to tax what is, not to pressure people to act a certain way due to the taxes they are likely to get.
Taxes are not to direct behavior but to observe it and then seek tax based on it. the tax penalty intentionally tries to change how people act. It seeks to encourage women into the paid labor force and away from care roles, whether they want to move there or not

9. that women need to move out of the home to fully participate in society, to fully use their skills or to be fully liberated

This is one definition of participating fully. The womens movement of the 1920s wanted to ensure women got full participation rights –voting, sitting in government, sitting on judicial benches, owning property, managing money – even if they were caregivers in the home. The movement to liberate women was not specifically to liberate them from being at home. It was to ensure that while at home they were not forced to be second class citizens. Current tax policy to pressure them out of the home actually fails to fully advance womens equality rights and still treats them there as second class citizens
10. that two people can live as cheaply as one – so they don’t need two full personal deductions. in fact two people usually move out of an apartment to buy a house, which costs more than two apartment rentals, and they eat for two and have two wardrobes and pay double admission and eat two full meals.

11. that the earner actually is the owner of property and the nonearner is not so it is important to ensure the earner gets the property

This is archaic reasoning that women are chattels and servants only. It ignores the dower rights and inheritance and divorce rights of spouses.

Misunderstandings of the incomesplitting proposal



1. It is forced on people _ in fact in the US people can choose individual or joint taxation. People can of their own free will choose the tax rate that benefits them most.



So penalties about one style against the other in individual exceptional circumstance are not reason to reject the option. People can choose for themselves.



Jamie Golombek, VP of taxation at AIM Trimark Investments says there should be an option, not a requirement to file joint returns, as in the US. He says that this would allow income to be taxed as a family unit for those who prefer that strategy. In the US there are several options of filing as there are in several other nations.



To share income does not mean to total the incomes and pay at the high tax rate.

It does not mean to total the joint incomes, divide by two and tax twice at the middle rate.

This system was used in the US from 1948 to 1969 but now there is a separate scale for those who declare as sharing income.

It does mean having a separate scale for taxing households which share income. In most cases the tax rates is lower for those whose income has to spread over more than one person. In the US there has been criticism of some of the divisions of the tax rates and areas where the household tax may be slightly higher for the single earner couple than the double but generally by the option to be taxed on the household scale, the tax is lower.





2 .That the lower earner will now pay more tax. _ In fact the higher earner pays less tax so they pay a middle level based on shared income. The claimed penalty on the lower earner is not evident.



3. that those who want it are already rich. The assumption is that if you can afford to be home; you must not ‘have to work’. In fact the couples with two incomes earn more than does the couple with one income so the ‘rich’ are the dual earner couple. There are many motivations for women earning parttime or fulltime and one is financial but this only proves that the state is imposing a pressure to earn regardless of personal preference of young mothers. Another pressure is social – to get women to be more financially independent, again a pressure imposed by the states view of what independence means and its degrading of the caregiver role. But a third reason for women to earn outside the home is that of love of career and many dual income households actually have very well paid earners one of whom could technically afford to be home but who chooses not to.

Therefore one cannot assume that all people at home are wealthy or that

The ones who are not at home had no choice



4. That this is a move to keep families together and to discourage divorce. The idea that this will strengthen the traditional family over other household arrangements.





In fact this move is to recognize those who share income and need not be based on marital status.

Dec 2003 Madame Justice Ellen Macdonald of the Ontario Superior Court ruled that samesex couples were entitled to Canada Pension plan benefits if one of the partners died. The lead plaintiff was 76 year old George Hislop whose partner of 28 years, Ronnie Shearer, died in 1986. The tow had shared income and business ventures and Hislop had lived on Shearers income.



Nov 2004 Dr. Rod Beaujot of the U of Western Ontario in Earning and Caring in Canadian Families examined a definition of family based on function not form. Stats Canada uses two definitions of family, one the definition for census purposes and the other a definition based on economic sharing. The Vanier Institute of the Family in Profiling Canadas Families notes that the 1983 concept of a family with a male head of household has profoundly changed. The institute now defines family as ‘any comnbination of two or more people who are bound together over time by ties of mutual consent, birth, adoption or placement and who, together, assume responsibilities for physical care, addition of new members, socialization of children, social control of members, production, consumption and distribution of goods and services, and finally, love



Current law actually penalizes marriage and gives tax breaks for child support only if you are not married. The income splitting option would remove a current penalty and level the playing field. To remove a discouragement is not to create an encouragement. It is marriageneutral. There are already many disincentives to marriage such as loss of personal freedom, need to consult on decisions of career, travel, residence, recreation and there are legal obligations about medical care and financial provision. The income splitting option would only remove one of the penalties and only for those who wanted it removed.



5 .That this is to encourage people to have children and that it would keep homes stable for children. There is the theory that this by encouraging children would penalize those who do not have children.



In fact this would simply value care of others, be they children, the sick, handicapped,elderly or dying and that it would also recognize other unpaid but needed roles such as care of the farm, pets, household management or any other tasks the couple in its wisdom have deemed worth the time commitment of an unpaid household member.



This would be recognition of the fact that some people choose to spread their income over others and to share. In the case of those who provide care of children there is a social benefit since children create the next paid labor force and tax base. In the case of care of the handicapped, elderly or dying, care of them in the home reduces the social bill of formal institutional care and the risk of larger bills were such care receivers neglected. Those who do not provide care of others currently nevertheless benefit from the fact that others in society do provide such care.



Income splitting by itself does not provide significant incentive to take on the huge costs and time commitment of raising a child though it may be of help to some. There are currently many other disincentives to having children such as loss of freedom, and increased financial and legal obligations. To permit income splitting would only remove one of these obstacles.



6. That this is welfare or a handout to the caregiver.



In fact the care of others is useful to society and to recognize its value is to recognize work. In Beijing in 1995 Canada promised along with all other UN nations to start to tally and notice the value of the unpaid care sector that has in traditional economics been uncounted. To permit income splitting is step towards recognizing the work that has anchored economies and provided 1/3 of the GDP, but which has been neglected in ledgers.



7. That this would only help married couples



Many options of legislation are possible but it is logical to provide the incomesplitting option for all who share income, with marital status not relevant.



8. That this would encourage women to be dependent.



In fact current law forces some women to be dependent financially if they are at home taking care of children or the elderly. The forced dependency is not a personal preference of many women but is a consequence that the tax code imposes because it does not recognize the value of any work that is unpaid. To permit income splitting would recognize that the athome spouse is interdependent with the earner, not dependant. The option would give women or male caregivers at home independent recognition and dignity for their work in the home and would give them full person status in that role. It would actually be a step forward for womens equality rights since the role is overwhelmingly historically female.



9. That this issue only affects families at the income extremes – those with one adult at home with no income, and those with two adults with fulltime income.





In fact the issue affects all households with more than one adult. All gradations of earing style along the line, including one earner earning fulltime and one parttime, one earning at top salary and one earning at lower than highest potential salalry in order to be home to do care roles, those who do paid work at home but who take a pay cut to do so, and all income styles between. The gradation of the penalty is felt by all and the only ones who do not pay penalty are that rare couple with identical incomes as each other. The largest penalty is imposed on the single income family but all households pay some gradation of the penalty.





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