The Fallacies of Income Splitting
by Kim Brooks, Professor, McGill University
Delivered at FAFIA’s National Symposium, December 2 2007

Overview of Income Splitting

Income splitting is when one tax payer transfers a portion of the income they control to someone else for tax purposes, so that they are subject to a lower tax rate. The goal of income splitting is to pay less tax collectively. Income splitting is generally a bad public policy for women. It attempts to achieve family work life balance by encouraging one full timer to go to work and one family member to stay at home. Income splitting demonstrates how tax policy can be used to discriminate against women since income splitting and family taxation are old ideas deeply rooted in women’s disenfranchisement.

In her presentation, Kim Brooks illustrates who benefits from income splitting, who is excluded, as well as detailing the gendered implications of income splitting for women.

The Significance of Tax Policy as a Federal Government Investment Tool

• Tax policy and the technical details of tax proposals can quickly become complicated. But, at their core, most debates in tax rest on a few relatively simple ideas.
• If you have some sense of the underlying concepts and ideas you can quickly and quite reasonably participate in debates around tax policy.
• In this short power point presentation, I don’t presume to tell you everything there is to know about the gender implications of tax policy. Rather, I am simply trying to give you the under 10 minute nutshell guide to the gendered implications of income splitting. I am also using income splitting as but one illustration of why you might care about tax policy if you care about women’s equality.
• This presentation, then, has just these three modest objectives: 1/to leave you with the sense that tax policy matters for women; 2/to explain why income splitting is a bad idea; and 3/to inspire you advance women’s equality using the tax system.
• My name is Kim Brooks and I teach tax at the Faculty of Law at McGill, and I currently serve as the chair of LEAF.
• Despite how dreadfully dull taxes may seem to be, the Income Tax Act is the largest single piece of social and economic policy legislation we have in the country. Indeed, that single piece of legislation provides for an enormous part of the government’s spending in any given year.
• Consider these tax expenditures and their costs, these are in millions of dollars:
• Tax support through the tuition tax credit, 265 million dollars.
• The disability tax credit, 465 million dollars.
• The non-taxation of capital gains on the sale of houses, 3 billion 390 million dollars.
• Child care expense deduction, 695 million dollars.
• And pension income splitting, the topic for today, 650 million dollars.
• Each of these tax expenditures is equivalent to a spending program. You may recall for example that there was a time when all Canadians with children received the child allowance- a monthly payment to parents with children. That program was repealed and, instead, the government brought in a child tax credit. All that happened was that the government changed the delivery mechanism. First, we subsidized the raising of children through the monthly payment. It was a direct subsidy. Then the government changed it to be delivered through the tax system as a tax credit. We normally refer to that type of tax program as a tax expenditure. But the two programs are functionally equivalent. In other words, the government could choose to deliver the mechanism directly through a payment, or they could choose to delivery it through a tax system, by giving someone a tax credit or in some cases a tax deduction.
• So, as feminists, we need to be as attentive to the social and economic programs delivered through the tax system as we are to the social and economic programs delivered directly.

What is Income Splitting?

• Let me turn now to talk about income splitting to illustrate why women might care about the social and economic policy implemented by the government through the tax system.
• Income splitting is a relatively straight forward concept and it’s based on two underlying principles. First, our tax system taxes individuals on the income they earn. The idea behind the individual unit of taxation, as opposed to a family unit of taxation, is to tax people on the income they control. In other words, if you earn and control the income, you should be the person subject to tax on it. The second principle is that our tax system taxes people more if they earn more. This is sometimes referred to as progressive taxation. The idea behind this principle is that the more income you earn, the easier it is for you to sacrifice part of each additional dollar. The rate you pay on each additional dollar is called your marginal tax rate. As your income increases your marginal rate of tax increases. In other words, if I earn ten dollars it’s much harder for me to sacrifice one additional dollar then it is if I earn one hundred thousand dollars.
• Income splitting is what you do if you’re able to transfer the income you earn and control to someone else for tax purposes, and that person is subject to a lower tax rate. The goal is to pay less tax collectively. Because the person to whom you’ve transferred the income is taxed at a lower rate, that person pays less tax on the income then you would.
• The fundamental question that underlines the income splitting issue is a deceptively simple one. Should a person’s personal relationship be taken into account in determining their tax liability? The income splitting proposal announced in the fall of last year allows income splitting for seniors. Specifically, it permits seniors to have the lower-income spouse to record up to one half of the income of the higher-income spouse in the lower-income spouse’s tax return. The provision does not require that the higher income spouse actually transfer the income. It’s an entirely notional transfer. The big concern is that the income splitting measure will not stop here and that there will be further income splitting measures introduced in the future.

Why is Income Splitting Bad Public Policy for Women?

• Income splitting, generally, is bad public policy for women. And it provides an excellent example of how tax policy can be used to discriminate against women.
• First, income splitting and family taxation are old ideas. They are deeply rooted in women’s disenfranchisement and their time has come and gone. Income splitting is rife with political considerations. Indeed, most European countries initially adopted some form of family taxation because of the legal incapacities of women. Income splitting was adopted in the United States in 1948 as a deliberate method for giving high income tax payers a tax break and, at the same time, reinforcing the traditional role of women as stay at home caregivers. The idea was to encourage women to leave the manufacturing jobs they had undertaken during the war.
• It is retained in the United States for reasons of dependency. In other words, once you’ve adopted income splitting, it is very hard to unwind that policy. All of this is well known to tax policy analysts. Yet, they remain complicit in statements publicized in the press that the U.S. has some form of income splitting. And that fact alone tends to give the idea some legitimacy even if the political history is not understood.
• Second, income splitting and other forms of family taxation strike at the heart of women’s equality. One should openly discuss the kinds of groups who support income splitting and who keep it on the agenda. Most people don’t support income splitting because of some notion of tax justice. Others support it because they think it will lead to the kind of society they envision, namely one in which mothers are encouraged to stay home and look after their own children.
• Income splitting for couples is consistent with attempting to achieve family work life balance by encouraging one full timer to go to work and one family member to stay in the home.

Income splitting largely benefits wealthier couples in which individuals earns significantly more than the other

• Third, income splitting provides benefits only to the rich. In order to benefit from income splitting, a tax payer has to earn over $35 000 dollars. This excludes the majority of Canadians, and especially women whose average income in 2004 was a little over $26, 000.
• By far, the greatest rewards from this income splitting measure go to those in the top bracket. Indeed, for a spousal unit where the high income spouse earns $200, 000 dollars/year, the benefit of income splitting is almost $8000 dollars/year. But this is scarcely a group of people who need government assistance.
• Fourth, it provides no benefits to families with equal income spouses, low income families, or single individuals. The only people who can split income are people who are in recognized partnerships where one spouse earns more then the other spouse.
• The measure simply cannot be rationalized. One can try to rationalize the decision to implement income splitting, but one would soon tire. The decision was presumably a political move by the government designed to compensate wealthy angry seniors who lost money because they had invested in income trusts. Tax vehicles designed to provide an end run around the corporate income tax. Attempting to rationalize the decision is absurd, and no sensible person can do it.

Income Splitting is NOT advantageous to most women with children

• Indeed the two arguments most frequently marshalled in favour of income splitting are best described as underwhelming. First, some commentators argue that it assists women who care for children. That is probably the best argument in its favour. But it insults the important care giving work women do and fails to justify the form of the tax subsidy.
• Here are the problems, just to list a few:
• Income splitting benefits all one earner families, whether or not they have children.
• It provides benefits to two earner families, even if one spouse is not looking after children at home, if they have dispersed incomes.
• It benefits primarily men.
• It provides no benefits to couples earning less the 35 000 thousand, over 40 percent of taxpayers.
• The benefit goes to the breadwinner, not the caregiver.
• And the size of the subsidy depends on the disparity in the spouse’s income. A consideration that would appear to be irrelevant in terms of subsidizing families with children, and that results in families with one high earner receiving by far the largest subsidy.
• Plus, if the government were serious about caring for children the answer is easy; extend our schooling system so that it begins as close to birth as possible. Call it something like “universal daycare” or even better; give it some serious title “universal, free, early education.”

Income Splitting does not meaningfully address senior’s poverty

• Second, some commentators argue that it assists with poverty reduction for seniors. Allowing the elderly to split their pension income was probably one of the most outrageous tax changes in recent years. When a large percentage of single, elderly persons are still living below the poverty line, indeed about one quarter of a million elderly persons live below the poverty line in Canada, with no prospect of increasing their well being, to have introduced a tax change for the elderly that provides this group with no benefits and yet provides huge benefits to the least needy group in society is staggering.
• The benefit does absolutely nothing to benefit low income seniors who are in relationships with other low income seniors, nor does it do anything to assist low income single seniors.
• Indeed, at a minimum, if one was going to undertake this measure and claim that the purpose was redistribution one should have required that the income actually be transferred to the lower income spouse. This problem is also easy, if you want to assist seniors living on low income, increase payments under our public pension plans.

How to discuss income splitting and tax policy with friends and colleagues

• This kind of conversation sometimes leaves people asking “well what can we do?” Well there are two possible next steps. First, don’t be afraid of the perceived limits of politics. All too often I find myself and my friends saying things like “yes, but will they buy it?”
• And that they in this case might the governments and the courts, but what is remarkable is our deference to our perceived sense of what is saleable. Indeed, I urge all of us to go much bigger. We should ask not for what we think is possible but rather for what we think is desirable. Let’s encourage democratic deliberation about what is in the public interest and not pander to the broad public choice literature that has convinced so many that indeed politicians and courts act selfishly in their own interests and that those interests need to be pandered too.
• Second, I urge you to resist places where people complain about their taxes. Indeed, if people complain it’s a marvellous invitation. You can say something simple like “every year when I file my tax return I think about the things my taxes purchase for all of us; roads, schools, a justice system, sidewalks, streetlight, social assistance, fresh water, subsidized electricity, assistance in saving for retirement, healthcare, support for farmers and fishers, subsidized public transit..” Pick your favourite things and list them off.
• Only when we look seriously at what we get for our taxes can we evaluate whether indeed we do pay too much tax.
• Hopefully this brief introduction has been a helpful starting place to think about income splitting.
• There are many other possible tax policy issues that could be explored but this is one of the most current and important debates that has been raised in recent memory. Thank you.

To download a copy of these transcripts, click here:
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To download the powerpoint presentation to accompany these transcripts, click here:
Powerpoint [2]