Couples’ income-tax sharing should be welcomed

Forty years ago, a Royal Commission that had been appointed John Diefenbaker produced a six-volume report recommending a long list of changes in Canada's income tax system.

Although the major conclusion of the commissioner, Kenneth Carter, was that fairness should be the foremost objective of any tax system, the recommendation that got the most attention was that a key element of this fairness should be the taxation of families, rather than individuals.

Under the commission’s proposals, all families would be treated equally. If there was just one breadwinner who earned $50,000, the family would pay precisely the same income tax as another family where husband and wife each earned $25,000.

Although welcomed by a lot of Canadians, the proposal was not adopted when the Pierre Trudeau Liberals drafted the new Income Tax Act, which came into force in 1972. Undoubtedly, the main reason was that the change would be too costly, since families with stay-at-home moms would get a major tax break.

As we see it, such a move announced by the Harper Conservatives should be welcomed by all Canadians as an important step toward fairness. The current system sees some families with an overall income of $80,000 a year obliged to pay about $3,500 a year more in income taxes than others where husband and wife have similar incomes that total the same $80,000.

According to calculations by the Canadian Taxpayers Federation, a family in which one spouse earns $80,000 a year and the other has no income must pay $12,460 in federal income tax, but a family with two spouses each earning $40,000 pays a total federal income tax of just $8,940, a saving of $3,520.

Under income splitting, both couples would pay $8,940.

Similarly, a family in which one person earns $60,000 and the spouse earns $20,000 currently pays total federal income taxes of $10,280. Under income splitting, that family would also pay just $8,940, a saving of $1,340. Income splitting is common in other

countries, including the United States, where couples have the option of filing joint or separate tax statements. Germany, Switzerland, France and Portugal also allow joint statements.

The concept was praised by Prime Minister Harper during the last election campaign. And Flaherty, who brought in trust income splitting for pensioners Oct. 31, has never ruled out extending it to other Canadians.

As was the case when the Carter report was on the table, such a move would be costly for the government, some economists estimating it would cost Ottawa about $5 billion a year. But the government did have a $13 billion surplus last year, and Flaherty clearly wants to establish a reputation as a tax-fighting finance minister.

“Canadians pay too much tax, and the tax burden on individuals, families and businesses is still too great and must be reduced,” he told the Commons finance committee earlier this month.

However, income splitting is also likely to become controversial, with opponents suggesting it would be unfair to single Canadians and a disincentive to women working outside the home.

Critics say it would alter the fundamental nature of the tax system - that making the family a basic taxing unit would make the system less progressive.

The concept may well become a feature of a 2007 federal budget that’s expected to include both some tax breaks and income splitting that would be great vote-getters and dovetail with the Conservatives’ advocacy of policies that would be welcomed by middle class families.

With the opposition parties already threatening to defeat the minority government over the budget, it will be interesting to see whether the proposed tax changes will be a major factor in a spring election. But as we see it, income-splitting can easily be promoted as introducing basic fairness, something that all parties ought to endorse.

In our view, most Canadians would welcome such a move as basic fairness, and something we ought to have had since at least 1972.