Purpose of Family Tax

The purpose of the Family Tax Act generated by the Canadian government was to help make life more affordable for Canadian families (Department of Finance Canada, 2014). Introduction of income splitting was to initiate tax fairness to the country’s current tax policy. Prime Minister Harper said that the goal of the family tax act is that every family with children will have more money in their pockets to spend on their priorities as a family (CBC News, 2014). Although studies completed have established doing this through income splitting does not hold utilitarian principles.

The Family Tax Act has been criticized to predominantly benefit the rich through income splitting. The introduction of the $50,000 transfer restriction is a benefit heavily concentrated among couples with one spouse who earns in the top tax bracket and the other spouse makes little or no income (Meier & Wrede, 2008). This allows for wealthier families to manipulate the tax rates they pay individually, allowing them to pay fewer taxes collectively. The idea of income splitting is a concept similar to one of a regressive income tax system and lacks horizontal equity. The family tax act allows for people who earn more to pay a proportion of taxes at the same level as a person who makes less. Thus, disproportionately reducing taxes to the higher end of the income distribution line. Income splitting would allow for the top 5% of Canada’s richest families to gain more benefit than the bottom 60% combined.

Restrictions made to the terms of the family tax act disregard financial services to those who need it the most. Family tax act only recognizes traditional family units leaving all other family units neglected (Macdonald, 2014). It would be most practical to adopt characteristics of a progressive tax system, where those who make less be given more tax break opportunities. To be eligible for income splitting you must be a 2-parent household with a child under 18 years of age. According to Stats Can in 2011 the median income for a traditional family unit was $114,000 while the median income for a female lone-parent family was $46,500. From all Canadian households, 85% of families would gain nothing because they do not fit the criteria of a “family” based on the terms of the Family Tax Act (Laurin &Kesselman, 2011).

The family tax act would also have a negative impact on consumer spending. A study done in 2013 by the President’s Council of Economic Advisers showed that allowing the middle class tax rates to rise could cut consumer spending by 1.7% and slow the growth of GDP by 1.4%. The labor supply will correspondingly decrease because of this decrease in spending, furthermore shortcoming