Financial Policy

Forget income splitting, tax the rich

Harper’s “tax reform” designed to impact more than government revenues
Photo: Mendolus Shank

Tax may not to be a four-letter word, but neither is it a one-trick pony. Rather than merely raising government revenue and redistributing income, taxes can affect the distribution of power in the home and at work.

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The tax reform centrepiece just introduced by the Conservatives not only reduces the government’s ability to raise revenues, it is also openly touted as a way to reinforce the 1950s nuclear family. Instead of cutting taxes for the wealthy in a way that risks making households more unequal, let’s tax them to get some power back in our workplaces.

Leave It To (income-splitting) Beaver

First, a quick recap. There are two major pieces to the Conservatives’ most recent tax change: income splitting, or the Family Tax Cut, and the extension of the Universal Child Care Benefit.

Income splitting is a tax cut for two-parent families with children under 18 years old, where one spouse who earns more can shift income to the other to lower the family’s overall tax bill. Benefits from this are very disproportionately going to go to families earning above the national median.

The extension of the UCCB is an additional cash transfer, although limited to those with children — in other words, new government spending. The upside? It boosts the incomes of the working and middle classes. The downside? It doesn’t satisfy fans of targeted transfers, as it also goes to the wealthy, thus wasting resources, and it doesn’t satisfy fans of universal programs, because it benefits the rich without support for high-quality public services.

So the Harper government is essentially proposing a tax cut for the rich, and a cheque for everyone to make it easier to swallow. All told, these moves amount to a modest increase in spending — about $200 to $300 million per year starting in 2015/16 — that all but wipes out the government’s medium-term surpluses, which could have been spent on much-needed social programs or green infrastructure. (For a full, more wonky breakdown of the changes, see this summary.)

So the Harper government is essentially proposing a tax cut for the rich, and a cheque for everyone to make it easier to swallow.

But the income-splitting tax cut isn’t just a fiscal measure, it’s also social policy. It’s aimed at making the traditional family model, where one parent stays at home, more attractive. Since women still on average earn far less than men, encouraging more two-person families with children to have one parent stay home inevitably encourages a return to a 1950s-style nuclear family — and potentially, the power imbalances and gender dynamics that go with it.

Tax the rich!

So what if rather than cutting taxes on the wealthy, we were to actually raise their taxes? Increase the top tax rate? We’re constantly told that this will not do much, as there are too few wealthy people to raise much revenue from hiking only their taxes. This is, to an extent, true. Plus, the rich would simply hide their cash, send it offshore, change how they do things. There, however, is the rub: turns out there are good reasons for taxing the rich beyond raising revenue, and these reasons have precisely to do with changing how things are done.

The Nation has an excellent explainer of a recent study on the drastic fall in top tax rates over the past few decades. The authors, including Thomas Piketty of Capital in the 21st Century fame, wanted to see why the share of pre-tax income going to the very richest rose at the same time as top tax rates fell.

In short, they found that the rapidly growing incomes of those at the top were not due to rising productivity as mainstream theory suggests, but resulted from a better bargaining position. When top tax rates are low, CEOs, financial managers and others are motivated to spend more time trying to raise their earnings — for instance, stacking corporate boards that set salaries or giving out bigger bonuses — because they’ll get to keep more of them. Across countries in recent years, growth rates were very similar regardless of whether the top tax rate was high or low; the pie grew more or less as fast everywhere. In the countries where top taxes were low, however, top earners were able to capture a much, much bigger piece of the pie for themselves.

While these effects were biggest in the U.S., Canada’s experience has not been far behind. Indeed, at a recent talk in Vancouver, Emmaneul Saez, one of the co-authors of the study, said that Canadian trends are largely driven by trying to keep up with the U.S. For example, while CEOs in the U.S. make 354 times more than workers, Canada’s CEOs are right up there, making 206 times more than workers. There is surely room to bicker about how much Canada differs, but the overall facts are clear. We can raise top tax rates not only, maybe not even mostly, to fill public coffers but also to help restore bargaining power to the rank and file in workplaces, making top managers less willing to make out with all that they can for themselves — a top-down aid to those fighting inequality from the bottom up.

The lesson here is that taxes do much more than just redistribute income.

The lesson here is that taxes do much more than just redistribute income. They can also change institutions such as the family and the firm, redistributing power and changing how we relate to one another. The more pernicious tax cuts for the rich do more than leave money in well-heeled pockets. By the same token, the opposing call to “tax the rich!” can be a way to achieve more than padding the public purse.

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