Taxing families: does the system need an overhaul?

Canada has maintained an ambiguous approach to family taxation for decades. It's time to address the problem

March 1, 2008  |  by Jack M. Mintz , Palmer Chair in Public Policy at University of Calgary

Springtime is tax time. It is at this time of year that Canadians watch the federal and provincial governments deplete their bank accounts. There has been some progress in the past decade to reduce personal income taxes, yet there is much more that needs to be done to correct for the high taxes raised to fight the deficit during the 1980s and early 1990s.

The issue is not just one of high taxes, however. Canada has an ambiguous approach to family taxation and no clear application of principle has evolved over time. This has resulted in inequitable tax treatment for families with the same earning power. Raised 40 years ago by the famous 1966 Carter Report, which argued for equal treatment for families, still today, a single-earner family pays much more tax than two-earner families. This is an issue that should be corrected, and this can best be achieved by providing opportunities for families to split income more readily.

Income splitting (or family taxation, as it is known), alongside correcting for structural inequality, would help families immensely. It makes a simple point, though the method by which we attain fair family taxation is complex. Problems arise because we have a graduated tax structure – individuals or families with higher incomes pay a greater portion of their income in tax than those with lower income. Under the existing Canadian tax system, two-earner families pay less tax than a single-earner family with the same income.

Consider two Ontario families, each with two children – one with two working parents earning $35,000 each and the other with one working parent earning $70,000. Assume the only credits used are for basic personal and child exemptions: The two-earner family pays $10,364 in 2007 federal and Ontario tax while the one-earner family pays $14,165 in tax, or 37 per cent more. With rents, mortgage payments, car lease obligations, food, clothing and other demands, the additional $315 monthly penalty is a burden on the single-earner family.

It makes it much more difficult for one of the parents to stay at home to raise children or spend time doing voluntary work. Ultimately, high taxes imposed on single-earner families drive people to make choices that they may not wish to make. It is an important social issue, too, given Canada’s falling birthrate and aging society; recent empirical work, especially by Kevin Milligan at the University of British Columbia, has shown that tax policy has a significant impact on fertility rates. Effectively, all industrialized countries are struggling to achieve equal treatment of families and Canada should be no exception.

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