Income splitting to drain workers from labour force, particularly women: PBO

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OTTAWA — The Harper government’s controversial income-splitting tax plan will encourage some workers — particularly women — to leave or stay out of the labour force, the parliamentary budget office said Tuesday.

In a new report, the federal budget watchdog said the government’s so-called “Family Tax Cut” will lead to a small drain on the workforce: the equivalent of 7,000 net full-time jobs.

The plan, it said, provides incentive for the lower-earning partner in some households to stop working.

Since men are the primary breadwinners in 80 per cent of Canadian households, the budget office expects women to make up the majority of those who withdraw from the workforce.

Last fall, Prime Minister Stephen Harper introduced the multibillion-dollar measure, a key pledge in the Conservatives’ 2011 election platform. It was announced in time for this spring’s tax season.

The measure allows eligible taxpayers to transfer up to $50,000 of income to his or her spouse in a lower tax bracket in order to collect a non-refundable tax credit of up to $2,000 per year.

The plan, which the budget office said would cut public revenues by $2.2 billion in 2015, has come under fire from opponents.

Critics have called it an unfair policy that provides no relief for 85 per cent of all households, while giving more benefits to higher-earning families.

The budget office report drew similar conclusions.

It found the measure only benefits about 15 per cent — or two million — households, with high and higher-income earners making up the bulk of those who qualify. Other studies on the Conservative government’s income-splitting plan have produced similar findings.

“As a result, if you look at it that way, it’s regressive in a sense,” assistant parliamentary budget officer Mostafa Askari told reporters.

The measure has been controversial and politicians quickly weighed in on the budget office report.

Employment Minister Pierre Poilievre issued a statement shortly after the study’s release, though he didn’t directly address income splitting. He stressed that the Conservatives’ overall plan to cut taxes for families remained on the right track.

Opposition parties were swift to cast the report’s findings as further evidence the income-splitting plan should be scrapped.

NDP finance critic Nathan Cullen called the measure “wasteful and ineffective.”

Liberal finance critic Scott Brison said: “Anything that costs $2.2 billion and actually hurts jobs and growth is clearly wrong-headed.”

The report also found earners in the bottom 20 per cent of the income distribution have “near zero” eligibility for the tax credit.

On the other hand, it said about 27 per cent of households in the 80th income percentile are projected to qualify for income splitting.

The office’s estimated cost of income splitting — about $2.2 billion — was higher than the government’s projection of $1.935 billion.

The measure also arrives at a time when the country is trying to attract lower-wage workers into the labour force.

The budget office’s report said the measure will encourage secondary earners in qualifying households to work less because taking on their spouse’s wages could move them to a higher tax bracket.

The study estimated the anticipated effect of lower-earning partners staying out of the workforce will reduce their participation in the labour supply by the equivalent of 14,000 full-time jobs.

It said this will likely be offset, in part, because the tax measure also encourages the primary income earners in each eligible household to work more.

The budget office says since main income providers could fall to a lower tax bracket, they might have increased incentive to earn more. The result, the report said, will add the equivalent of about 7,000 full-time jobs.

Askari described the overall net effect as “pretty small” because it represents less than 0.04 per cent of total hours of labour supplied and less than one 0.01 per cent of total employment income.