Thank you, Mr. Chair and members of the committee, for inviting me to speak to you today.
The first message for you is don't cut taxes. Although the federal budget is close to balance, the federal government still has substantial debt. Moreover, there are serious fiscal challenges on the horizon. Provincial finances, particularly those of Ontario and Quebec, are in poor shape. The population is aging. More income is coming from capital, and capital income is hard to tax. There are other threats, like international tax planning, which also could potentially erode the tax base.
So the first message is don't cut taxes.
The second message is if the federal government does wish to deliver tax relief, it should look to increasing efficiency, or equity, or both. Income splitting does neither.
Generally speaking, the most efficient tax system is one with a broad tax base and a low tax rate. Income splitting reduces efficiency because it raises the effective marginal tax rate faced by secondary earners, by which I mean the lower-earning of the two spouses. If an at-home spouse decides to enter the labour force, some of the tax savings achieved by income splitting will be lost. The loss of tax savings raises the at-home spouse's effective marginal tax rate. Yes, it reduces the primary earner's marginal tax rate, but primary earners tend to have inelastic labour supplies. What that means is basically they work regardless.
Income splitting reduces the marginal tax rates of people who aren't very sensitive to tax changes—that's the primary breadwinner—and it increases the marginal tax rates of people who are sensitive to changes in tax rates, and that's secondary earners. Basically, income splitting has efficiency costs.
Income splitting also doesn't increase equity. Most of the benefits go to higher-income families. It doesn't recognize the work-related expenses borne by a two-earner household and it ignores the value of household production. At a given money income, a dual-earner family has a lower standard of living than a family with an at-home spouse. I oppose income splitting precisely because I believe household production is valuable.
Caring for the kids at home doesn't necessarily mean mom at home, dad at work anymore. Canada's parks are filled with grandparents pushing strollers. Families juggle schedules so that one parent can be home with the kids at all times. The at-home parent at playgroup is likely working nights or weekends to pay the mortgage.
Income splitting is a bad idea. But if the federal government is looking to cut taxes, more support for families with children is a good idea.
In the 1960s, my mother's family allowance cheque paid for a week's groceries. In 2011, the median Canadian two-parent family had an income of just over $90,000. Their Canada child tax benefit probably doesn't come close to paying for a week's groceries.
The Harper government has already gone some way to providing greater tax recognition for the costs of children through the introduction of the universal child care benefit and through the introduction of the non-refundable child amount credit. I support both those policies, but they're overlaid upon a CCTB system that has good things, but also bad things.
First, because the CCTB is clawed back as the family's net income increases, it doesn't provide generous support for a typical two-parent family in one of Canada's major cities. Basically, if you're a two-parent family in Vancouver or Toronto and you're earning enough to pay a mortgage, you're probably going to get very little support through the Canada child tax benefit.
Secondly, CCTB clawbacks increase the marginal tax rates faced by parents of children. As I said, efficiency up, marginal tax rates down.
Third, the CCTB is based on net family income. The income calculation is the same for a two-parent or a one-parent family. This can create a non-trivial marriage penalty for low-income individuals.
Basically, the best way to support families with children is to give money to families with children. I would advocate doing so through a new program that combines the best features of the CCTB and UCCB and supported Canadian families.
Thank you for your time.