Thank you, Mr. Chair.
I am very pleased to be here with you today. Thank you for the invitation to appear before the committee.
Back in 2011, following the federal election, I authored a study with Professor Kesselman of the C.D. Howe Institute on the family tax cut, or what was at the time the income-splitting proposal. Our study took place four years ago, so it was based on the assumption that provinces would follow suit, that provinces would also adopt income splitting, and there was no limitation other than the $50,000 limit to be split.
Today, I'll be very quick, and I'll simply present what were our main conclusions from that original study and what has changed since, because we now have a new income-splitting proposal that is very different.
Originally in our study we said the proposal was expensive, especially because of the cost to provinces that adds up to the federal. The benefits and the costs were highly concentrated mostly in the hands of single-earner families with a high-income earner. It created work disincentives for the lower-income spouses, so that means economic efficiency costs. We also discussed the theory around welfare and single-earner families enjoying some welfare gains by not having to pay for child care or for the value of any other family services that are provided by the at-home spouse. But those services have to be purchased by the dual-earner families, where both spouses work, so it creates gains for the single-earner families and costs for the dual-earner families. Dollar for dollar, in theory, the equality of tax burdens between single-earner and dual-earner families does not necessarily achieve tax fairness. That's the theoretical principle that we discussed in that study.
Finally, for families with children, we calculated that after-tax economic resources available for consumption, factoring in the cost of child care for any families that incur child care costs, and EI and CPP contributions, too, which are often forgotten, on average, across a wide range of family incomes, there was no obvious horizontal fairness problem to be solved. I can elaborate later what I mean by horizontal fairness, but I want to keep going because I only have five minutes.
The new provisions, the provisions in this bill, are significantly different. It's a different kind of income splitting because, first, it's a tax credit, so provinces don't have to participate. It changes a lot. The value is capped at $2,000, which is critical. These new provisions do mitigate many of the drawbacks we had originally identified. First, it is less expensive, and it still has that benefit of making the system fairer for one particular case: those dual-earner families that are identical in many or all respects but for their income splits—one is earning more than the other, and so they have different tax burdens. This new income-splitting provision will address that fairness problem, obviously. The tax savings are very spread out across eligible families, now that we have a cap, since the cap greatly—and I say greatly—limits the gains at the top. Before, in our original study, when the provinces were included in the calculation, the maximum gain for a single-earner family in Ontario was $11,000. That's much more than $2,000.
Tax benefits now being capped also means that single-earner families will still pay more taxes than dual-earner families when they have identical levels of income. That's consistent with the principle that I mentioned before: single-earner families enjoy welfare gains that dual-earner families do not.
Finally, the work disincentive problem is substantially mitigated with the $2,000 cap, since the lower-income spouse can now earn up to $22,000 in income before any disincentives kick in.
In conclusion, there are still some drawbacks, but the new provisions are better than the original proposal.
Thank you.