Income Splitting Inadequate for Gen Squeeze

As more people consider the challenges facing Generation Squeeze, some ask why I don’t recommend income splitting as part of the New Deal for Families.  My answer is simple.  Income splitting doesn’t provide tax breaks for the majority of families, and it doesn’t deliver enough help even to the minority who benefit.


The Green Party of Canada is the most avid proponent of this tax change, calling for “full income-splitting to reduce the tax burden on married couples and families.”  The Conservative Party of Canada echoes this sentiment on a smaller scale.  After his government balances the federal budget several years from now, Prime Minister Harper commits to establish “the Family Tax Cut” for couples with children under age 18.  If implemented, this policy change will give spouses the choice of sharing up to $50,000 of their household income for federal tax purposes.


Who gains from income splitting, and by how much?


According to the Prime Minister, 1.8 million families will benefit.  Since Statistics Canada shows there are more than 4.7 million families with children under 18, his plan only helps 38 per cent.


Income splitting does not benefit most families with kids because it offers no help to couples in which both parents earn similar amounts.  Nor does it help lone parents.  Instead, the Conservative plan benefits a minority of couples in which one parent earns less than $25,000, and the other earns quite a lot more.  This scenario is especially common for couples when one parent stays home – 18 per cent of Canadian families.


But even for families with a stay at home parent, income splitting is insufficient to remedy the time, income and service squeeze with which they struggle.  Consider a couple in which the breadwinner makes $54,330 – about the average income for full-time, full-year work in Canada.  Today, that family pays $4,041 in federal income tax.  Under the Conservative income splitting plan, the family will save $1,088 in taxes.



One earner couple, $54,330



Now


Conservative Plan


Basic federal income tax


$6,933


$4,227


  less Child amount


-$315


-$315


  less Spousal amount


-$1,377


-$0


  less Universal Child Care Benefit


-$1,200


-$959


Total federal income tax


$4,041


$2,953


Benefit from income splitting 


$1,088


Will an extra $1,088 per year really make it affordable for a parent to remain home with a young child when faced with the decision to work less, or not at all?


The answer is No.  $1,088 doesn’t compensate for the fact that the typical young couple in 1976 earned $65,360 after adjusting for inflation, often on one salary.  Today, the median income for one earner couples with kids is around $42,000 when the earner is male, and $25,000 when the earner is female.  Clearly $1,088 will NOT come close to closing this gap — the only thing that will is a second income.  And second incomes generally require thousands of dollars in annual expenditures for child care services.


Behold the burdens of Gen Squeeze.  Compared to when Boomers were rearing their kids, parents today must give up time at home that is worth thousands in child care and domestic work, or give up thousands in employment income.  And having forgone these thousands of dollars from their standard of living regardless of which decision they make, Gen Squeeze families pay housing prices that are 76 per cent higher than a generation ago.


Income splitting simply is not an adequate solution for the squeeze confronted by today’s generation raising young kids, even for the minority of Canadian families who will benefit.  It is true that income splitting delivers perhaps the largest tax break we can devise for some families.  But the bottom line is that tax cuts cannot bridge the generational gap in the standard of living.


By contrast, the policy changes I propose as a New Deal for Families CAN bridge this gap.


During the first year of a child’s life, the New Mom and New Dad Benefits would inject around $15,000 of after-tax income into the home of an average one-earner couple.  Thereafter, the benefit plan gives the family more choices, offering the primary breadwinner (often the dad) the opportunity to afford six months at home when the child is 12 to 18 months.  When dads take advantage of this time, moms are more likely to re-establish their ties to the labour market.  Should a mom choose to remain in the labour force once her child is older than 18 months, even if just for a day or two a week, $10/day fees for quality child care services will mean that families keep more of this extra income.  Should the parent elect to pursue full-time employment, $10/day child care will literally save the family thousands of dollars.  In families that choose instead for a parent to remain home full-time until the child starts school, the extra $15,000 from the New Mom and Dad Benefits would deliver nearly triple what the federal Conservative income splitting plan will provide over those first five years.  And it will dramatically improve access to part-time preschool experiences for their kids at an affordable cost of $7/day.


For families that count on two earners, the New Mom and Dad benefits would inject approximately $15,000 after-tax when couples split a year at home with a child age 6 to18 months.  Thereafter, Flex-Time changes would invite dual-earner families to trade some earnings from about 4 weeks of employment to gain 22 additional days at home with their kids.  For most families, there will be little or no after-tax reduction in their disposable income because $10/day child care will save thousands in fee expenditures in order to compensate for the reduction in wages.


For low-income parents who cannot afford to trade any income for more time with their kids, the New Deal will triple the National Child Benefit Supplement.  This policy change in combination with a child care fee waiver for households with incomes below $40,000 and the New Mom and Dad Benefits would all but eliminate poverty among families with children under age 6.  In combination with Flex-Time, these changes would also enable families that are working-poor now, including many lone parents, to afford an additional four weeks of time per year at home while their kids are preschool age.


It is time for Canadians to acknowledge that we require bold policy change to address the decline in the standard of living for Gen Squeeze, to value the diverse choices families make as they wrestle with this decline, and to promote gender equality for moms and dads.  By contrast, income splitting dabbles with old-fashioned policy thinking, which will not address the seismic socioeconomic shift now confronting the generation raising young kids.


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