Monday, 4 April 2011

The rich get richer

Jay Bryan, 'Tax break' conceals low benefit:
The most interesting thing about the first major campaign announcement of Stephen Harper’s Conservative Party is what it conceals, not what it reveals.

This proposal, entitled the Family Tax Cut in the Conservative Party press release, would cost a whopping $2.5 billion a year, and is pitched as a way of lightening the burden on hard-pressed families raising children.

But what’s not said is that most such families would receive little or nothing from this costly measure. And that’s on purpose.

If you’re a single parent raising a child, you get nothing. The tax break is solely for families with two parents.

This even though single-parent families have a much higher poverty rate: about two and a half times as high as the poverty rate for working-age couples with children, notes Katherine Scott, director of research at the Vanier Institute for the Family.

If you’re in a family where both parents work and receive similar paycheques, you get little or nothing. The tax break, which allows a higher-income spouse to split income with a lower-income one, is only helpful where there’s a big difference in salaries.

... The Tories attempted to spin this as a tax break for ordinary Canadians by stressing the tax break it would represent for a family in which one spouse earns $70,000 and the other stays home. They’d save about $2,000 in taxes by being taxed on the equivalent of two $35,000 incomes because tax rates are lower at lower salaries.

That’s a pretty good saving, and it’s true that a family in this situation would have reason to be pleased. But are they representative? Not at all.

The Library of Parliament research service studied the impact of a proposal like this in 2007 and found 61 per cent of the tax savings would go to families with incomes of more than $90,000.

A stunning 92 per cent would go to families with above-average incomes of $60,000 or more (those income figures would be higher now). Families with lower-than-average incomes would get just eight per cent of the tax benefit.

... There would have been a simpler way to help families with the cost of child-rearing, said Finn Poschmann, director of research at the C.D. Howe Institute: simply increase the existing child tax benefit. That route would have targeted the families in greatest need, since this benefit is tapered off as incomes rise, and it wouldn’t have left out the majority of families with children.

“While this seems on the face of it to be about equity, it really does advantage a group of families with higher incomes,” Scott said. She also notes the equity argument is weaker when you consider spouses who stay home to care for children do get excellent one-on-one child care in return. That has very considerable value.

Of course this stay-at-home vs. childcare argument is an old and bitter one, and a mere business columnist can’t say who’s right. But I can say one thing: this government has taken sides and chosen to punish the losing side.
I should disclose my personal interests here. I'm a high-income taxpayer, and my wife is a stay-at-home mother. This tax break would give us $6000/year. So why don't I support it?

For one thing, it's vaporware. The estimated cost is $2.5 billion per year (plus an additional $1 billion in provincial revenue). I'm puzzled about where this money is supposed to come from. I know that Harper says he won't introduce it until the budget is balanced (which the Conservatives don't have a credible plan for), but that's not really an answer. If there's a temporary surplus, the tax cut is enacted, and then the budget falls into deficit again, we've now added $2.5 billion to the permanent structural deficit (already at $14 billion, according to the independent Parliamentary Budget Office). It's really easy to increase spending and cut taxes (which is what Harper's been doing for the last five years), really painful to cut spending and raise taxes: you're taking money away from people. Having gone through this in the 1990s, I'm not looking forward to a repeat.

And even after we go through the pain and balance the budget (how?), we'll still have a mountain of debt to pay off. Cutting taxes instead of paying off debts isn't fiscal conservatism.

The reason Harper's promising this (apparently it's a long-standing Reform Party plank) is that a sizable number of people regard the current system as unfair: a two-income household, with each person making $50,000, doesn't have to pay as much tax as a single-income household making $100,000.

The counter-argument is that our current tax system is based on individual incomes, not household income. For the most part, Revenue Canada doesn't care whether you're married or not, or whether you have children or not; and it shouldn't.

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