Want a truly fairer tax system? Focus on families
Tax fairness is all the rage these days. The recent federal budget is titled Fairness for Every Generation. If that isn’t clear enough, Finance Minister Chrystia Freeland hammers home the point on the first page: “We are making Canada’s tax system more fair,” she declares in her foreword.
But how fair can a tax system really be if it treats households differently even though they have identical incomes? If Freeland wants to make Canada’s tax system fairer, she’d drop her stale “tax the rich” routine and focus on this inequity at the heart of Canada’s personal income taxes.
Regardless of their personal circumstances, all Canadians are required to file their taxes as individuals. Together with our steeply progressive tax schedule, this means that for any given total income, a couple with significantly unequal earnings will pay more tax than a couple in which both partners earn the same amount.
Consider two similar families living in Ontario. In the first, both parents earn $60,000. In the second, one parent earns $120,000, the other nothing. These households have the same financial resources, yet the second family pays over $7,000 more a year in taxes (not including Canada Pension Plan or employment insurance). Why? Because with our progressive rate structure, the single-earner’s second $60,000 tranche of income — from $60,001 to $120,000 — faces a higher marginal tax rate than the two separate $60,000 incomes earned by the first family.
According to Statistics Canada, 2.2 million couples in Canada rely on one income. Plus, an unknown number of the 5.1 million dual-income earning couples will have earnings unequal enough to trigger some form of tax penalty. In short, it’s not a trivial issue.
And yet we’ve had a fix on hand for at least 68 years.
In 1966, the Royal Commission on Taxation — Canada’s only and still widely admired comprehensive review of the tax system — concluded that fairness should be the central focus of taxation. “The present system,” chair Kenneth Carter wrote, “does not afford fair treatment to all Canadians. People in essentially similar circumstances do not bear the same taxes.” To correct this unfairness, Carter proposed that the tax system recognize the family as “the basic economic unit in society.”
Requiring that everyone file individually ignores the reality of how Canadians actually live their lives. Today, as in the 1960s — and every decade before or since — families pool their income to run their households, pay off debts and save for the future. And if the household is at the centre of all financial decision-making, it should also be the centre for taxation as well. “We recommend that the family be treated as a tax unit and taxed on a rate schedule applicable to family units,” Carter wrote. Unfortunately, his advice for some form of joint filing by couples was ignored when the Pierre Trudeau government finally updated the tax system in 1971.
Today, personal income taxes are still levied on an individual basis. And yet eligibility for a wide variety of social benefits and tax credits, including the Canada Child Benefit, Canada Workers Benefit and GST credit, is based on family income. In essence, families don’t exist when paying taxes to government, but they do when trying to get benefits from government.
Not only is this illogical and unfair, but it also adds needless complexity to the tax system. According to the Chartered Professional Accountants of Canada, more than $1.2 billion in social benefits go unclaimed every year, largely because low-income Canadians can’t figure out how to claim them.
Arguments against familybased taxation often rely on some form of the “barefoot and pregnant in the kitchen” trope — that allowing families to jointly file their taxes is sexist and outdated because it will lead to more mothers staying home, which gets in the way of efforts to raise female labour force participation rates.
And while it’s true joint filing entails higher marginal tax rates for at-home spouses entering the workforce, if we accept Carter’s logic that households are the basic decision-making unit of the economy, we ought to let those households make their own decisions about how they allocate their time between home and work. Besides, the argument that joint filing is sexist presupposes that women can’t be the higher-income earner in a family. Yet of the 2.2 million single-earners heading a family in Canada, more than a third are women.
Rather than relying on budget-cover bromides such as “fairness for every generation,” what Canada really needs is another authoritative tax review modelled after the Carter Commission. And such an exercise will almost certainly come to the same conclusion Carter did: that in the interests of fairness, simplicity and coherence, families should be the main focus of the tax system.
Ideally, putting familybased taxation into practice would be combined with a simplification of the entire tax structure. Treating families fairly would allow for the removal of the multitude of boutique tax credits and other complications that currently clog up the tax code. It could also put an end to complex anti-income splitting rules for small businesses, which would greatly simplify life for entrepreneurs. Finally, a simpler and more coherent tax system would allow for an overall lowering of tax rates — surely a goal of every fair-minded tax reformer.