(February 27, 2014) The family should be recognized for its fundamental role in wealth creation.
By Lawrence Solomon, published by the National Post on February 27, 2014
Many left-leaning advocacy groups and some on the right criticize the federal government’s income-splitting proposal as sops for the rich that offer nothing to 85% of Canadian households. To the contrary, the middle class and especially the poor would be profound beneficiaries of income splitting, along with society as a whole.
Poor households are overwhelmingly dominated by the unmarried — just 12% of the households in the bottom quartile are married, compared to an 86% marriage rate for the wealthiest quartile, according to a study published this week by the Institute of Marriage and Family Canada. “Because of the enormous economic advantages in marriage both to marrieds and society at large, tax reforms among other incentives are warranted,” says the study’s co-author, Philip Cross, formerly the Chief Economic Analyst at Statistics Canada.
The family is a firm as well as a basic social unit. It is an economic unit whose members jointly advance its welfare, not merely through a main breadwinner’s formal employment but also through mutual emotional support, housekeeping and child rearing, and through a spouse’s public relations role via dinner parties, networking and strategizing over whether to quit one employer for another. The very word “economics” originates in ancient Greece, where it meant “household management.”
Yet instead of recognizing the family firm for the coherent money making machine that it has always been, Canada’s income tax system illogically divides the family firm by separately taxing its components. This is akin to separately taxing a corporate firm’s various departments — human resources, marketing, public relations, etc, — rather than the firm as a whole.
Prior to Confederation in 1867, Ontario and other jurisdictions taxed family possessions — not only real estate but also chattel such as carriages, billiard tables and pleasure craft, and at times also income from personal property. These jurisdictions recognized the family as the economic unit and taxed it as an economic unit. When Canada introduced the personal income tax in 1917, it was seen as a tax on the family’s breadwinner, not as a mechanism for distinguishing between spouses. The U.S., which introduced its income tax in 1913, allowed joint returns by 1918, formally recognizing the family as the economic unit.
Canada in the early 20th century didn’t formally recognize the family as the economic unit because it was academic — with the traditional family having but one breadwinner, the concept of a “marriage penalty” had not yet materialized. When married women became common in the workforce and it became evident that the tax system inadvertently penalized marriages by taxing both spouses separately, the Carter Royal Commission on Taxation in 1966 and later others attempted to change tax law to treat the family as the economic unit. But by then it was too late — feminists opposed income splitting on grounds that it discouraged women from joining the workforce, since the woman’s income would be taxed at a high family rate when combined with her husband’s, rather than at her lower rate.
Had the sexual revolution not occurred, the feminist veto on income splitting might not have hurt women. But the Pill, relaxed sexual attitudes, liberal abortion and liberal divorce not only liberated women, they liberated men — from responsibility. With sexual partners aplenty, men no longer needed to attentively court women, to fear shotgun weddings or other consequences of their sexual conduct. And they no longer needed to get married, certainly not on any woman’s timetable, either for sexual satisfaction or for respectability. Neither did they need to stay married.
With the decline in marriage, society has lost an important driver of wealth. Women in particular got the short end of the stick as marriageable men became scarce for those who wanted to get married. More children began to be born out of wedlock or to be raised by single parents. Disproportionately, these people now populate the poorest quartile of Canadians. Despite government subsidies, more than 20% of single mothers, and more than 33% of their children, live in poverty.
The failure to split incomes is only one of many government policies that discriminate against families. If Canada’s tax system allowed income splitting, the unwanted consequences of the sexual revolution would not disappear. But they would diminish, because fewer of those women would be abandoned singles, fewer of those men would be footloose and irresponsible.
As one example, a single man earning $40,000 a year today can pay more than $6,200 in taxes to federal and provincial governments. Under the current tax system, he would see little immediate financial gain in getting married to his impecunious, long-time girlfriend. But under a full income-splitting system where he and his wife would each report $20,000 in income, tying the knot would lower the tax bill to $3,500, a marriage benefit of $2,700. By the same token, he would also have a financial incentive to stay married — if they split, he would end up paying the taxman that $2,700. The incentives to get married, and stay married, only increase as the incomes increase.
Opponents of income splitting often claim that 85% of Canadian households (which are disproportionately populated by single households) would gain nothing from income splitting. Yes, maybe so, in a world in which financial incentives don’t matter. Because incentives do matter, many of those now involuntarily stuck in that single household demographic would migrate to married status and then — as the study from the Institute of Marriage and numerous others have shown — would have the moorings that tend to lead to future prosperity.
Lawrence Solomon is executive director of Urban Renaissance Institute.
The Macdonald Laurier Institute quotes this article in relation to the work of MLI senior fellows Philip Cross and Peter Jon Mitchell, co-authors of The Canadian Marriage Gap study cited by Lawrence Solomon above.
IMFC debunks myths on income splitting
Plan sees family as a unit with two workers. Lawrence Solomon is quoted for this article.