Writing in the Globe and Mail, Macdonald-Laurier Institute Managing Director Brian Lee Crowley says the federal government’s income splitting plan will help to fix an imbalance in Canada’s tax system that has for too long penalized certain families.
By Brian Lee Crowley, April 30, 2015
Andy Pedersen is a pretty unusual guy.
Mr Pedersen works in the communications division of a trade union. He got my attention because he wants his family to be treated unfairly by the income tax and he thinks Ottawa can spend his money better than he can himself. Clearly an original thinker.
Ok, he might not have characterized his thinking in quite the way I have, at least on the first point. Mr Pedersen discovered he had the option of refusing the income splitting the recent budget introduced for working couples. He got in the media spotlight by posting his intention on Facebook to turn this tax break down, despite it being worth $1500 to the Pedersens.
The grounds for his refusal are that “we can find a way to spend it, for sure, but we definitely do not need it.”
Fair enough. But like many of the critics of the income splitting provision he is silent on the fact that he is refusing the government’s effort to correct a serious unfairness in the income tax system, one that hurts Mr Pedersen and his family.
A basic principle of taxation is that people in similar situations should be treated the same way. In the absence of income splitting, however, similar families are today treated very differently by the tax system. Suppose Mr Pedersen earns $80,000 and his wife stays at home and earns nothing. Now say there’s another household with two earners, each earning $40,000. Even though both households have an $80,000 income, that income will be taxed quite differently.
Because Mr Pedersen earns the entire income, he’ll be taxed at the high marginal rate that an $80,000 income attracts. But in the other household, that same $80,000 will attract a lower rate solely for the arbitrary reason that it is earned by 2 people instead of one. What’s the difference amount to? At a minimum the $1500 the Pedersens have turned down. Even if Mr Pedersen believes that government needs more money to meet Canadians’ needs, why he should pay $1500 more than a similarly-situated family to make up the shortfall?
Mr Pedersen presumably wants a fairer society. But you cannot achieve a fair result through unfair means, and it is this fundamental tax unfairness income splitting seeks to reduce. If you think government should do more, make the case for raising tax rates on everybody; don’t cling to a bad system that makes arbitrary and unjustified distinctions between people.
How about Mr Pedersen’s other argument, namely, “I disagree… that we as individuals are better at deciding how to use that money, that we are somehow more effective spenders. That flies in the face of all kinds of common sense. When you pool money together, [it] becomes more powerful and you can do more with it.”
Ah yes, but not all pooling is created equal. It is true that you get economies of scale if you pool your money in a pension plan, a mutual fund or an ETF. You can pool your risk of loss through insurance. On the other hand I remember belonging to a food co-op that pooled the buying power of its members. It ended up collapsing because we couldn’t agree on what to buy and I got tired of being given a box of groceries each week that wasn’t what I wanted even if the price was occasionally a little lower than in the shops. By going to the supermarket I pool my buying power with other consumers and get exactly what I want to boot without the co-op committee having to agree. The profit the grocer makes isn’t an extra cost we can eliminate, it is his reward for supplying what we want at a competitive price.
Anyway, taxation and government spending are not the same as the voluntary spending of consumers and investors. There is a lot of work in economics that shows that a dollar raised in taxation doesn’t just cost the economy a dollar, but somewhere between $1.25 and $1.50. The difference is due to politicized and inefficient government spending, waste, corruption, the high cost of bureaucracy and lots of other things. The higher the spending, the greater the cost to the economy in terms of lost growth.
And those who believe in the wisdom and beneficence of government never seem to want to follow their thought to its logical conclusion: to get full value out of our money we should “pool” it all. The state should commandeer our entire income and supply us with the food, clothes, housing and transport it thinks we should have. Wouldn’t that be a brave new world.
Brian Lee Crowley (twitter.com/brianleecrowley) is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.