The Family Tax Cut that the Conservatives say makes “the tax system fairer” disproportionately benefits one-income families with very high household incomes. I ran some numbers using the excellent Income Tax Estimator available here to find out how much benefit accrues to a one-income household with two children at various income levels. If you look at dollar amounts, families with incomes of $50K or less will save little to nothing under the Tory income-splitting proposal. But, as you can see in the following graphic, families with household income exceeding $100,000 will save substantial amounts on their income taxes.

[Tax Savings in Dollars with the Family Tax Cut at various income levels]

One could argue that, of course, higher income families would save more because they pay more in taxes. So, let’s look at the percentage of income tax a household could save when the Family Tax Cut is implemented. Ideally, what we’d like to see is lower income households saving a higher percentage on their income taxes than a household with a higher income. But, as the following graphic shows, that’s not the case with the Family Tax Cut. A household earning $50K will save 13% on their federal income taxes, which is less than the 16% that a household earning $200K would save. Single-income households with a household income of $90K will save a stunning 29% on their federal taxes.

[Tax Savings in Percentage with the Family Tax Cut]

This article has 28 comments

  1. It would perhaps be equally illuminating to post the % of tax paid at each of the income levels before and after income splitting across the various family income levels to see how “regressive” the new system is.

    From the graph above it looks like the largest tax decrease goes to “middle class” family incomes.

  2. Wow, and since the median family income is about 80K – 100K, it looks like it’s targetted exactly at the median income levels, not the ‘very high income’ as you describe.

  3. One-income families with large incomes (and access to accountants, etc.) are more likely to already be splitting their income through some means, e.g., by paying both spouses from a corporation.

    These families wouldn’t see much benefit to the proposed tax cut. I think it really is targeted at families with incomes in the 80 – 100k range.

  4. No, it’s targeted at single income families whose single income is 80K to 100K. A double income family where both parents earn, say, 50K get squat.

    I can’t stand these stupid targeted tax schemes that only serve to further complicate the tax code and hence result in the requirement to hire more accountants in the already ridiculous bureaucracy that is government.

    We should be simplifying the tax code and reducing taxes for ALL Canadians. Election talk always drive a libertarian like me totally crazy!

    Ignatieff’s crazy system of education credits is equally dumb. Why not just reduce tuition than creating this crazy new scheme which results in more paperwork and red tape? It’s complete insanity! Oh yeah, they have to increase public service payrolls to do it – and stack it with politically connected patronage positions paying exhorbitant salaries and pension plans. I forgot.

  5. Man, its not every day I get to agree with Phil’s comments, but he is bang on here. Couldn’t agree more Phil and well said!

    My only added two cents is this is about a benefit to happen IF they balance the budget and that isn’t going to happen for 5 years if at all. Don’t talk about it, don’t acknowlege it, and don’t give any politician (of any party) any credit or attention for saying what they MAY do in 5 years. It only encourages more of this b.s. and like Phil, that drives me totally crazy too.

  6. I dont know where you are getting your information commenters… check STATS CANADA, median family income is around 65K so the article is correct… this tax cut is for the rich.

  7. I’m not convinced that examining a proposed change of this nature is best examined in a now vs. then manner. My interest is to compare what the difference between two households is where both have 2 dependent children and both earn the same amount, where one household has one earner, and one household has two. The stated goal is to level the playing field, does it?
    Of course, then the analysis must incorporate child care, as the single earner home would clearly benefit from a savings in child care, while the dual earner home has more child care expenses. How does that apply to the level playing field?

  8. Is there a calculator out there yet where you can enter the 2 incomes and find out how much you will save? These graphs mean nothing to most people if they are assuming a 1 income family. Not too many stay at home spouses these days. It’s going to come down to the difference of your income compared to your spouses. If the 2 incomes are similar well this tax cut (let’s call it tax change), is useless. If there is a low income and high income earner there will be some savings.

  9. Reader Bill commented yesterday that a far better idea would be eliminating the second lowest tax bracket. That’s probably a big ticket item but the Tories could have cut the tax rate in installments. It would be cleaner instead of these so-called “targeted” tax cuts.

    I disagree with the opinion that this is targeted at middle income families. As you can see from the first graphic, the biggest benefit in dollar terms accrues to families with really high incomes.

    Ordinarily, a promise that’s supposed to kick in after four years at least isn’t worth debating. But we have an election coming up and promises are coming in thick and fast. We do have to take a good look at them.

    I agree that it is far better to reduce tuition instead of giving everyone. However, there is a twist in the Liberal idea. They are proposing to transfer more to low-income families. Still, it’s funny to see all these pols falling over each other to bribe us with our own money.

  10. @David: Try this calculator:

    http://www.walterharder.ca/T1.asp

    Enter your and your spouse’s current income. You can then find your current Federal tax under “Federal Tax and Credits”. Now redistribute the income, so that both your incomes are equal. The difference between the old total federal tax and the new total federal tax is your family’s savings.

    Even families that have roughly equal incomes will save some money here because we are taxed on net income not earned income. At least that’s how I think this tax cut works because, to be honest, details are a bit thin at this moment.

  11. @Eric: The median income of couple families for 2008 was 75880, with an average increase of about 4% per year for the chart I was looking at, which would put the 2011 income somewhere near $85354. This is almost exactly where the % of tax saved chart peaks.

    Rather than eliminate the second bracket I would be much more in favour of dramatically increasing the personal and spousal credits. I side with Phil S said regarding the complex nature of the tax system. I think we would be far better off with a high personal exemption, a flat tax percent, and a far simplified credit system.

    This plan seems targeted almost exactly at my family (One spouse earns most of the income, another earns spending money) and yet I find it hard to get behind. However, at least it’s fairly simple to understand and doesn’t leave too many loose ends like the Liberal RESP free money to help the rising cost of education. Once again it seems to be a choice of the lesser of two evils than supporting a plan I can support.

  12. CC, I have lost a lot of respect for you in this post. It is recycling old arguments about “who saves more” that were discredited years ago. One third of tax filers pay ZERO tax. You could say they get NOTHING from this proposal. So should we give them money to make them “equal”?

    The bottom line is that this proposal fixes a glaring inequity in our system, which is that a one-income family making $100K pays much more tax than a two-income family making the same money. Why should this be?

  13. As M points out, it doesn’t make sense to give two-income families this type of tax break because they already pay significantly less tax on the same income than one-income families. And the “hump” of maximal tax relief, on a percentage of tax paid basis, is roughly targeted at the median family income with children.

    This also helps even out the playing field for families that do not have government pensions, as private sector employees tend to retire 10-15 years after public sector employees, who gain access to the ability to pension split when they retire, and thus benefit from more than a decade on average of lower tax rates.

    I would remove the child requirement, but even that makes some degree of sense as families with children have higher expenses.

  14. This will definitely benefit the single income family as the income will essentially be halved (up to 100K) and probably fall a tax bracket or two.

    As the Holy Book … I meant the press release says:
    Mommy stay home and cook wholesome Mac & Cheese
    Daddy bring home the bacon
    Evening they do the hanky-panky and make lot of babies!

    I’m moving to Bountiful, BC. Anybody care to join me?

  15. I know this won’t be PC but if you are looking for a way to invest taxes in a way that will pay out in the future, this may not be a bad way.

    Big question – Does having one spouse stay at home mean a bigger family?
    Other question – Are children of middle->upper income families more likely to be middle->upper income producers.

    Then making it easier for one spouse to stay home (and even slanting it so that it is more appealing) would eventually produce more middle->upper income families and more taxes.

    Not really sure about the economics but I need someone to pay for my CPP and GIS

  16. So we’re SINKs (Single Income No Kids) and using the tax calculator on taxtips.ca with this proposal we’d gain approximately $3300/yr or $275/mth. Nice but nothing earth shattering. I suspect the savings would get gobbled up by something else like property tax increases, cable, phone or internet increases, insurance, etc.

    I’d rather just scrap the current tax code and implement a three tier system with no exemptions, no credits, no rebates, no offshore crap, no nothing, all your income in non-registered accounts including capital gains, dividends, distributions, interest etc. I’m just pulling these numbers out of the air as examples, no point arguing over them, say below $200,000 is taxed at 17%, above $200,000 is taxed at 34% and over $5M is taxed at 45%. Adjusted for inflation. If you screw around you get fined heavily and the really bad offenders spend time in prison, not the low security type prisons either. I would even look at combining the TFSA and RRSP together, eliminate tax refunds and have a combined contribution limit.

  17. Nice analysis. I must say that the bias toward the wealthy doesn’t look as strong as I suspected. However, I assume you did the calculations based on the second spouse earning no income. But, what happens if the second spouse earns $10k or $20k as is quite common? My guess is that the graph of percentage savings would shift out the right significantly. We need a 3-D graph that includes both spouse’s income!

  18. Dylan touches on something that was discussed on CBC radio this morning. It very much favours traditional family arrangements (one income, other managing the household, including taking care of children) and does very little for more modern famlies (two incomes, single parents) who usually have to really on the system for things such as daycare. The Conservatives supporting traditional arrangements – how surprising .

    And I also agree with Phil that Iggy’s plan is just full of paper-shuffling. Like we need more full-benefits, high paying government workers with low productivity levels. Thanks Phil for noting that – I actually didn’t think of it in those terms, although when I first heard of it, it sounded like a mess of an arrangement.

  19. Holy cow! For the few who agreed with me, I thank you very much for showing me that I’m not alone in my fear of unrestrained growth in Government bureaucracy – leading to the death spiral of higher taxation and more wasteful spending – by bribing us with our own money, as CC put it. I just find it insulting that the Government (any government, led by politicians of all stripes) thinks that they can put my money to better use than I can!

  20. @Traciatim: The financial proposals alone aren’t going to influence my vote either. Unfortunately, elections almost always are about picking among available alternatives.

    @M: I agree that there is a dramatic difference in taxes paid between an one-income family and two-income family with children. Yes, two-income families may incur daycare costs but they can deduct it from income. But I’m not sure this is the best way to fix it. This is a big ticket item; it is going to cost a lot of money and most of it going to help a small segment of the population that in my opinion needs less help than others. Ideally, it would be nice to see a proposal that would allow lower income households save a larger portion of their income tax (a household with $50K in income still pays $3,700 in federal income taxes) and a higher income family would get a smaller break in percentage terms. Of course, that may still mean that the higher income family saves more in dollar terms but that’s just a reflection of the fact that their tax bill is higher.

    @Viscount: I agree that two-income families with children already pay less in tax. I’m not saying they should also get tax relief though under this plan, my suspicion is they will benefit as well if there are disparities in income between the two spouses.

    @Sean: As Bryce points out, if that’s the plan, it may not be a bad one. I’ll pass on the invitation though. We have three kids and we’ve done our part 🙂

    @Bryce: That’s an interesting point. If a proposal such as this results in more future tax-paying units, that’s all good. I’m all for getting my OAS and CPP cheques when I’m retired and healthcare available to take care of us.

    @lister: Unfortunately, SINKs won’t benefit under this proposal. The income splitting is just for families with children under 18.

    @Michael: Yes, my guess is that the second graph will shift to the right as well. A 3D graph would definitely be interesting.

    @E: That CBC Radio One program is available here:

    http://www.cbc.ca/thecurrent/episode/2011/03/30/election-families/

  21. Right, that was kind of my point. Stuff like this should apply to everyone, not to a specific group of people. How’s that fair?

    • @lister: I agree. In fact, I’d argue that an one-income and a two-income family without children but with the exact same incomes are more identical to each other than families with children. When children are in the picture, the debate invariably turns to whether the economic circumstances are identical because of child care expenses.

  22. Little late to the thread here, but there is a reason that tax policy is “biased” towards two income families: a higher labour market participation rate is desirable. More people working means more people generating income, which tends to be a positive thing.

    Some people prefer the traditional arrangement of having one parent stay home to take care of children, which is 100% legitimate, but it’s not desirable from an economic standpoint. Such a move would logically have the effect of decreasing participation rates, which is not a good idea given the demographic challenges that will be amplified in the coming decades.

    • @Al R: Very interesting observation that I haven’t seen discussed anywhere. I agree with your point. For many families, it would become tempting for one spouse to drop out of the workplace because the financial incentive of working is reduced by income splitting. This may be an unintended consequence of income-splitting that is not desirable.

      In Jack Mintz’s article he says that there is some evidence that family taxation might positively affect fertility rates. I wonder if these two effects will cancel each other out. i.e. more stay-at-home spouses means less labour participation but more babies which eventually means more workers. I have a feeling the Tories haven’t thought this one through. But then, may be they are thinking this is just an election promise.

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  25. @CC – Interesting point regarding the possible tradeoff between labour force participation and overall fertility, but I would suggest that there are certainly other means of boosting fertility rates, such as improving the affordability of quality child care.

    It just seems bizarre to me that we would promote a policy that would have the effect of pulling people out of the labour force, especially when you don’t actually have to choose between work or having children.

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