Government Treatment of Families from a Tax Perspective

By Joseph Wurm*

 

Over the past couple of months, the Reform Party of Canada has been putting pressure on the Liberal government to change taxation policies for single income families.  In the current system, a single income family, which makes the same amount as a dual income family, will pay more in income tax.  A single income family will pay more in taxes because the family will be in a higher tax bracket, but the family will not be able to claim childcare expenses  (Morris, 1999).

The Reform Party believes this discriminates against one-income families and the government should lessen the burden of taxes on one-income families.  Harris (1999) claims that under the recent Liberal government budget, single income families will pay more than twice the amount of taxes that a dual income family earning the same amount of income will have to pay. 

The Liberal government believes that the system is fair. The government argues that single income families that make equivalent amounts to two income families should pay more in income taxes.  The government’s reasoning is that single income families are better off than two income families.  The Secretary of State for Finance, Jim Peterson (as cited by Harris 1999) said,  “If we have two members of a particular family who are both working, first of all they are putting in twice the working hours, but also have twice the expenses: the work related expenses of clothes and travel and the expense of not having someone at home to do the housework.”

                It is important to explore whether or not the contentions the Reform Party is making are true.  Does our present tax system discriminate against single income families or is the government right when it says the current tax structure is fair?  The analysis of this paper will outline the present structure and determine if the Reform Party has a valid argument.

We know that if the government reduces taxes in any sector the revenue shortfall will have to be made up in another area.  If the current tax system is unfair, then the only real way for the government to stay at its current level of revenue from taxation is to shift taxes to someone else.  One way that this could be done is by reducing taxes on single income families and increasing taxes on dual income families. 

Reducing childcare deductions for two income families and decreasing personal income taxes for one-income families could achieve this.

 

ANALYSIS

To look at the situation fairly, one must do some form of analysis on the Reform Party of Canada’s contention, and then judge if it is accurate and determine if there are any suitable alternatives.   Considering four tax scenarios of different family situations will perform the analysis.[2]  In each tax scenario, Spousal deductions and childcare expenses are the only variables.  Childcare expenses are assumed to be $3000.00 per year. 

 


Example #1

John and Jane Doe (two dependant children)

John’s income $35,000

Combined income $60,000

 

In the Canadian federal income tax system, a two-income family can claim expenses for childcare as long as both parents are working, or one is working and the other is looking for work.  In this example, since both parents are working, there is no deduction for spousal amount.  In this case, there is a $3000 deduction for childcare expenses, but a deduction of $5380 is lost because both parents are working.  In any scenario, the parent with the lower income must claim the childcare expenses.  This is the case even if one parent has only a part time job.  If one parent’s income is low enough, and the childcare expenses are deducted, the higher income parent may be able to claim part of the spousal amount as a deduction.

In this hypothetical example, once deductions for EI, CCP and childcare expenses are removed, this couple will pay $12,463.46 in federal income tax. (Appendix A)

 

Example #2

John and Jane Doe (two dependant children)

John’s income $60,000

Jane’s income $0

 

In this example, John Doe can claim a spousal amount of $5380.  This is something that he was unable to get in the previous example.  Unfortunately, he cannot deduct childcare expenses in this case because his wife, Jane, is the principle homemaker and raises the children.  Therefore, John cannot claim $3000 in childcare expenses.  This illustrates the argument that the Reform Party is trying to make.  They think this deduction of $3000, is unfair because having a homemaker who is unpaid is not a tax deduction or expense.

 

In this example, the single income family will pay more in federal taxes, largely because they are in a higher tax bracket.  The single income family making $60,000/yr. will pay $18,085.07 in federal income tax whereas in example #1, the couple will pay $12,463.46 in federal income tax.  The couple in example #2 pays more in income tax because they are in a different in tax bracket, they cannot claim childcare expenses (in this case, $3000), and they are able to claim the spousal amount. (Appendix B)

 

Example #3

Susan Doe

Susan’s income $60,000

(Two dependant children)

This example illustrates how our tax system effects single mothers or single parents.  This example illustrates the situation of a single mother that is making the same amount as the breadwinner in the previous example.  A single mother is in virtually the same tax situation as the one income family in the example before, but with a few minor changes.  The single parent is allowed to claim an equivalent to spousal amount of $5380 in addition to being able to claim childcare expenses. 

 

The tax system is fair to single parents by allowing them both of these deductions.  A single parent making the same amount as the single income family we had in the example will pay less in income tax.  In this example, the single mother will pay $16,663.38 in federal income tax. (Appendix C)  Without the deduction for childcare expenses, Susan would have paid the same in income tax as the single income family with a caretaker at home ($18,085.07) because both families could claim a spousal or equivalent to spousal amount. (Appendix D)

 

Example #4

Susan’s income $35,000

(Two dependant children)

 

In this example, illustrates the situation of a single parent making considerably less than $60,000/yr.  We will be able to compare this example with example #1, in which the larger breadwinner made $35,000.

Since Susan is a single parent, she is able to deduct childcare expenses, which could not be claimed by John Doe in example #1 because his wife made less money than he did.  Susan is able to also claim the equivalent to spousal amount for one of her kids, which also could also not be done in example #1. In reality, Susan is able to make two deductions that John Doe, who made the same amount of money as her, could not deduct.

Susan will have to pay $5667.18 in federal income tax. (Appendix E)  If she could not have claimed any childcare expenses, she would have paid $6961.15 (Appendix F).  This is considerably less than the $8373.10 that John Doe would have paid in example #1.  The reasons for these differences are that John could not claim the spousal amount and his wife had to claim the childcare expenses.

 

Summary of Taxes Each Household Pays

Dual income family

John and Jane Doe ($60,000/yr)

$12,463.46 in federal income tax per year.

Can use childcare expenses as a deduction,

But cannot claim spousal amount.

Single income family

John and Jane Doe ($60,000/yr)

$18,085.07 in federal income tax per year.

Can claim spousal amount,

 but cannot claim childcare expenses.

Single mother

Susan Doe ($60,000/yr)

$16,663.38 in federal income tax per year.

Can claim equivalent to spousal amount,

as well as childcare expenses.

Single mother

Susan Doe ($35,000/yr)

$5,667.18 in federal income tax per year.

Can claim equivalent to spousal amount,

as well as childcare expenses.

 

INTERPRETATION OF THE ANALYSIS

Through the analysis we can see that the single income family does in fact pay more in federal income tax, but not twice as much.  The extra tax paid is due, in part, to the fact that the tax bracket is higher for a family that has an income of $60,000/yr.  If the Reform Party is concerned with the single income family paying more in taxes than a dual income family making the same amount, the only real way to fix the problem would be to change the tax brackets, or make everyone pay the same percentage in taxes.  This situation would have enormous tax consequences.  If this alteration was an option, then the government would have to raise the taxes on lower income earners, such as the single income families making $35,000/yr or less, as well as the dual income families we saw in our first example.  If this was done, then the family in example two, which paid higher taxes, could have a tax reduction.   If the government wanted to maintain its same amount of revenue, this would have to be the approach taken.  This would shift taxes from the higher, to lower and middle class families.  This is definitely not a viable option and is surely not what the Reform Party or any government wants to do.  It would be detrimental to the society as a whole and would shift the “discrimination” against single income families to “discrimination” against dual income families and single parents.

Single income families, who do pay more in taxes, are actually better off.  The reason for this is due to the value of the work done in the household.  According to Statistics Canada in 1992, women in the household had a ratio of 1.73 to 1 when it came to amount of work done in the household.  This means that for every unit of work the man did in the home, the woman did 1.73 units of work.  This can primarily be attributed to the fact that women are the primary homemakers.  The value of this unpaid work is a benefit to the single income family and the dual income family misses out on the value of this production.  The increase in taxes that the single income family faces is fair because it benefits from the value of unpaid labor.

 

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POTENTIAL SOLUTION

If the Reform Party of Canada has a problem with the way the tax system treats Canadian households, it should look at a more viable option.  This would be to modify the tax credits on tax forms.  This is something that the Reform Party has looked into and it has come up with a number of potential changes, which are noted in Appendix G.

 

The most notable of these proposed changes is increasing both personal and spousal amounts. This gives families a tax credit equivalent to $7,000 for childcare expenses for each child under the age of seven and a refundable tax credit of $4,000 for childcare expenses for children ages 7-12.  Changes to the tax system in this way would be a benefit to families in all of the different situations we have looked at. (Kenney, 1999)

Another way that either the government or the opposition parties could look at helping families out, from a tax standpoint, is to make a change in the way childcare expenses are deducted.  The change would allow the higher income spouse to declare the childcare expenses.  The current system, the lower income earner in a dual income family has to claim the expenses.  If the higher income spouse could claim the expenses then they would pay less in tax, especially if the higher income spouse is in a higher tax bracket. (Miazga, 1999)

This reform can also help the single income family if the stay at home parent decided to get a part time job.  If the stay at home parent got a part time job and made only $6000-7000 per year, he or she would be allowed to claim the childcare expenses.  If he or she made even more than this, the breadwinner in the family would not be able to claim any of the spousal amount.   If the income of the part time worker minus the childcare expenses was less than $5380, (spousal amount) then the larger income earner could claim part of spousal amount.

                E.g.) Part time job = $6000/yr. - $3000 child care expense=$3000

                                $5380 - $3000 = $2380

Then, $2380 is the amount that can be claimed for spousal amount.  This shows us that a change of this sort would definitely be beneficial to dual income families as well as possibly a single income family if the stay at home spouse wanted a part time job.

Although one-income families seem to be at a comparative disadvantage, we have to realize that some families will get more satisfaction out of having someone at home to care for the children.  It may be hard to put a price or value on this, but it should be noted that this could be close to the extra amount that they pay in taxes.

The extra value that the couple could get from having someone at home could be value from knowing you are raising your own children.  This way, you can be proud of how they turn out.  You will also be able to spot any problems they may be having in their lives and deal with them appropriately as well as have time to spend with them. 

 

CONCLUSION

The Reform Party, as the official opposition, is supposed to keep the government accountable.  They are trying to do that by raising the concerns they have, but in reality we have to face the fact that there are benefits to having a parent at home such as raising the children and maintaining one’s own home.

Two income families are becoming more and more common, but this trend is not due to discrimination by the tax system while they were a one-income family.  It is due to a combination of things.  It is both because of monetary reasons, as well as personal reasons.  Many homemakers will want to get back into the work force after they have had their family.

The argument that the Reform Party is trying to make is the federal tax system discriminates against single income families.  This argument seems unfounded since the single income family has someone at home doing household work and raising children.  This household is obviously better off.  The very argument they use, “ single income families will pay more than twice the amount of taxes than a dual income family earning the same income will pay” is very one sided (Harris, 1999).  It is obvious that the single income family will pay more because they are in a higher tax bracket.  It has always been this way and if you consider it, it is fair. 

If a household with one income were to have the homemaker get a full time job, they would make considerably more than the dual income family we used in our example.  Is the Reform Party implying they should pay the same amount in taxes that they were before?  Of course not.  The tax system is treating the single and dual income families both equally.  It is also important that single mothers get a little bit of a tax break since they are caring for a family on their own.

It is not known how the Reform Party came to the conclusion that a single income family pays more than twice the taxes of a dual income family, but in the examples illustrated in this paper they definitely paid more.  The amount paid in extra federal tax does not seem unjust and it is hard to see what is at the heart of Reform’s argument.  Some adjustments could be made to the federal income tax system, but it would be virtually impossible and unfair to have a single income household and a dual income household both making $60,000/yr. to pay the same amount in federal income tax.

REFERENCES

Harris, Dick. Stay at Home Parents Mere Housekeepers, Say Liberals                 

http://www.reform.ca/harrispress/020399.html Retrieved March 2, 1999.   

Kenney, Jason, and Eric Lowther. Reality Check: Reform’s Position on Family Tax Fairness.  

                http://www.reform.ca/kenny press/090399.html Retrieved March 9,1999.

Miazga, Kelly of Liberty Tax Service. Personal Communication on March 23, 1999.    

Morris, Jason of Office of Dick Harris, MP. Written Communication.

                Harris2@pgonline.com Retrieved March 15, 1999.

Statistics Canada. Gender Equity Index for Paid Work and Unpaid Work. 1992



                [1] An earlier version of this paper was prepared for C. Echevarria (Economics 221.3) at the University of Saskatchewan.

[2]                      All examples were done with the assistance of Kelly Miazga of Liberty Tax Service in Saskatoon.