From Canada: Chicken and Eggs in the Tax System – a reflexion on bias and women’s rights

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by Beverley Smith

 There was with Aristotle’s theory of drama the idea that if you watch violence at the theatre it purges you of your natural appetite for violence. You do not become violent by watching such plays, but rather you are able to live out vicariously any natural impulse for violence. So in theory you are then purged of that impulse and able to be calm and collected –  or so I understand it.

This issue of whether you create a need or cater to it is a chicken and egg argument. It enters our lives in many ways and it certainly enters the policy decisions of legislators.

Should we permit pornographic magazines and movies?  It may be because some people have an appetite for them and this satisfies that appetite.  We may even be saying that to let them see such porn will ensure they refrain from aggressive sexual acts in real life.  The counter argument to that of course is that looking at porn might make a person more interested in acting it out in real life. With violence on screen and in video games, we have the same question.

We have the chicken and egg dilemma for how we legislate on a number of other issues. The tax system is meant to be neutral, to be a tax on current behavior and to fairly get from citizens a percentage of their income.  It is not supposed to entice people to change what they are doing.  However of course it does and it deliberately so in some policy areas.  For example government has decided it wants people to contribute to charities and to political parties,  so it has a special tax policy for that.  There is a tax deduction for such donations.  The thing is – is this prompting the donation or is it recognizing a donation already made,  which reduces ability to pay tax?  It seems that it is put in place, actually, as an incentive. The tax system is designed to actively encourage people to give to charities. Why?  Could it be that the government does not then have to fund as many social programs from the federal budget?

But when we look at other ‘allowed deductions’ on the tax form we wonder again if this is to encourage the behavior or to recognize the behavior that already happened?  It is fairly easy to be confused about this – and easy to suspect that government is actually favoring some groups by giving them deductions, to encourage a certain behaviour, while sometimes it’s clear that the state aims to compensate a person suffering a particular disadvantage in life.

Take disability benefits. Clearly the person with a disability has more costs than the person who does not, for medical and housing supports and therefore,  to ‘level the playing field’ , one must remove that penalty.  So a deduction for the costs of the disability is obviously not an encouragement to become disabled, but a fair recognition of what is already being experienced by an individual. But there will be a small group of people who may fake being disabled in order to get the benefit.   So there’s tight government scrutiny to see that claims are legitimate.

With office expenses, clearly if you have to have a desk and a lamp and a car for your business, these are part of the costs of doing business and are not just personal expenses. You deserve the right to have those as deductions from what is considered pure profit the state can tax.  However, a person may enhance the expenses, to include things that may not be necessary to run the business, such as drinking wine with dinner at the business dinner, or staying at the most expensive hotel, rather than just the mid-grade one.

The irony of tax deductions is that they are often given to the ones who already have significant advantage and income. It is as if the ones in the system (who already are doing well)  know how to lobby legislators, have the means and time to make a good case while the very poor have neither.  So,  tax breaks are often perceived as tax ‘loopholes’. And the agenda of the chicken and egg argument starts to look not so much as a way to recognize costs, but as a way to get favor with the tax filer who then may provide a vote.

On the issues of caregiving we see chicken and egg arguments writ very large.

We have spousal deductions, childcare deductions, sports and arts deductions. We have tax categories for child support payments, for lottery winnings and for gifts and inheritances. When we look at the rationale behind such deductions or exemptions we can legitimately wonder if the state is recognizing an unavoidable disadvantage and cost, or if it is encouraging a certain pattern of behaviour.


a. Spousal deduction:

Is allowing a person the right to declare a spouse as a dependant a recognition of their relationship and its financial cost, or does it cause people to become  ‘dependent’?  That is the question.  Some women’s rights activists were so very keen to get women out of the home and earning their own money to show their independence, that their priority was to withdraw help from those who were home, regardless of the unpaid work carried out at home –   especially the work of caring for family. They wanted to ignore any financial loss of being home (loss of second income)  and to create incentives to be out of the home, in paid work. So they wanted a reduction of the spousal deduction.  And indeed they won. The spousal deduction used to be 1/3 of an average income in the 1960s and now it is less than 1/10 of an average income. 

Is the state therefore discouraging women to be home? I think so.  By reducing the deduction in relative terms to the cost of living, it has created a penalty, and on purpose. Yet in theory the deduction was to recognize a real cost – the cost of caring.

b. Childcare deduction

It is well understood that it costs money to raise a child, that children are a country’s future –  and that having a child reduces ability to pay tax. So it is commonly agreed in most countries that the tax system should value those who do have and raise children and should recognize some of their costs, by providing a family allowance, birth benefit, maternity or parental benefit, and a deduction for some costs of raising a child as a dependent.
However despite the glowing theory of all that, Canada’s governments in the past have been reducing the deductions they provided.  The family allowance was made taxable, then removed. The child dependent deduction was removed.  The Liberal government in particular had removed most recognition that it costs money to raise a child.   The latest Conservative budget takes some steps to provide again some deductions to all parents raising children, but with a catch. 

The catch is the higher funding for some types of care provision over others.  What type is deemed most worthy? The answer is daycare – third party care, outside the family. Why? The theory is that this particular type of care is not viewed as optional.  Policymakers rationalise that it is a type of care some parents need, are desperate for, and can’t help needing. It’s argued  that we must (as a society) give special tax breaks to those who use daycare to level the playing field for them in the career world (compared to those who don’t have children).  The argument is that the behaviour of using daycare is already ‘ a given’.  However it could be argued, and I do argue it, that this policy intends to encourage more daycare use, because the tax break is not in fact offered to any type of childcare.   Rather,  it is a targeted benefit that favors only one care location and style.

And so it may claim to be a ‘deduction for childcare’ but it is actually a deduction only for one type of care. And therefore it deprives people of choice and pressures people into a particular kind of behaviour favoured by government. Why would it do that?  Could it be that the daycare lobby is very strong?  The impression is given that only professionals can  offer  ‘childcare’, and can be trusted as caregivers of kids.  Also the impression is given that the  ‘norm’ is for two parents to work outside the home. Even those who have paid work at home, who telecommute, who use sitters or grandparent care do not deserve help for their costs.  This is an argument clearly that greys the area between choice and coercion.  Does the woman work outside the home and use daycare because she has to,  or is because this is the only option the state helps to fund?

c. Sports and arts deductions

When government decided to fund care of kids as they pursue courses or team participation in sports and the arts, we had another chicken and egg dilemma. The state clearly wants kids to be fit and to have cultural skills in the arts. But,  how to get there? This deduction does not fund the child or the parent to fill those needs as the parent sees fit (for example by buying a piano or bicycle or pair of skates). It funds only the hiring of third parties to give the exposure to these skills. And by excluding the parent it ignores ways to reach the sports and arts goal. By only recognizing out of pocket paid care it choose to ignore the very real costs of buying equipment for use at home, or the costs of the instructor to give up some income in order to spend time teaching a child at home. If a licensed piano teacher teaches her own child to play the piano, the assumption the state is making is that that teacher’s skills have no value because they are for a family member.  It is an assumption that ignores the income loss of the piano teacher who is not having a paid customer that day. So here one sees that the state is not really recognizing current practice or full costs, when it ignores some costs and only recognizes others. By funding only some music and arts exposure, based in fact on who provides it, the state is creating and one might even suspect intentionally, a bias towards one lifestyle and away from another.
The lobby for parents who have high hockey fees or high summer camp fees is obviously strong and one need not argue their deductions are not merited. They are. The point though is that so would be the deductions of others who provided music and arts more informally.

d. Child support payments

Divorced couples clearly feel they have extra expenses other families do not have. They usually now maintain two homes not one, and have two vehicles not one. They make a strong case that they deserve some tax recognition of their additional costs. However in reality married couples often also have two cars, and do have household costs. In an effort to be kind and sympathetic to those divorcing we may have also moved to give a lot more tax breaks to those divorcing than to those not, and this may become in a small way, an incentive to divorce. A married couple cannot deduct household costs or costs of taking care of a child.  It is odd.

It was likely not intended as an incentive. It was meant as a recognition of the fact that a person who earns and does not have child custody now has to pay out money to his ex spouse, to help pay for clothing and feeding the child, and that it is not fair to tax him as if he were single, though he in marital status is.  However the problem is that a married man cannot deduct the costs of feeding and clothing the child.

Nobody gets divorced so they can get the child support payments. But it is a common game to claim that you have child custody so that you get the support payments. It is apparently common to fight, sometimes viciously to get custody on paper, to get the regular money  –   and common for spouses to argue percentages of time the child spends with each.  In this way the cart is leading the horse and the recognition of costs is driving behavior.  It might be a lot fairer to have costs of feeding and clothing a child a ‘deductible’ whatever the marital status of the parents is. Then there may be fewer divorces, but even if there were not, the divorce process might be way more amicable.

e. Lottery winnings

Lottery winnings in Canada are not taxable. They are in some countries. The Canadian government has apparently decided that it will not penalize this behaviour, which in effect ends up being that it encourages this behaviour. Why? Many lotteries are for charities and for hospitals and social programs so lottery money may help save the federal and provincial governments costs.  It is ironic that gambling addiction is a big problem among adults and that the state takes a large percentage of the profits, while officially discouraging it. 

f. Gifts and inheritances

In Canada gifts and inheritances are not taxed. In some countries they are. Clearly by not penalizing this behaviour the state is also encouraging it.  It may be that when the wealthy lobby government they make the case that they should have the right to pass on their estate and their land to their own family and not to have the family end up with a huge tax burden and even have to sell the assets to pay the tax.  It is a logical case.   But it it based on the assumption that money in the family belongs to the family and that the family is an economic unit, generationally. However if we tax people as individuals  and do not really permit full income splitting on paper then the state is giving two messages at once.   It says it encourages the family and yet by individual taxation it discourages it.

g. Social policy

In government policy we also have programs that are intended to help the disadvantaged,  but that also  ( one might argue) sometimes encourage people to appear poor on paper. It is a dilemma and the state is aware of malingerers and inspects them.

Although there is a humanitariandesire to not have anyone suffer, and the state has welfare programs to ensure nobody does, there is also a game played about welfare.  If payments for welfare enable people to live a decent life with dignity, then this recognises people who for health or other reasons simply can’t make it alone. However there may be people who don’t want to work, even if they could, preferring to be on welfare. So the state wants to be kind and make welfare adequate and yet to make welfare low enough that nobody wants it by preference.  The problem is that those who really need support and who are unable to do paid work are then stuck with a low income designed as a deliberate disincentive to those who may not genuinely need welfare.

With income splitting, we have another chicken and egg dilemma. In theory a household shares the same basic budget. They all eat at the same table, go out in the same car and live in the same house so there is not a rich person there with a lot of poor people. They share income and standard of living.  The spouse, as one of my colleagues used to say, is not left in a dark corner living off bread and water while the other spouse eats steak.  So to allow households to be considered an economic unit is not only logical but a reality of practice.  However there are many who resist this move as if to tax a household this way would encourage sharing income, and would somehow limit the sense of identity of individuals. Some critics are even worried that to allow income splitting would encourage women to depend on men and would harm women’s rights. I do not agree at all,  but yet again it’s an example of that old chicken and egg argument. The critics are worried income splitting would cause a behavior and I feel it would only recognize a current behavior.

Conclusion:

The state is not neutral in this and we probably don’t want it to be fully neutral. After all  we want it to help the poor and give them a lower tax rate or no tax. We want the state to tax the rich fairly so that the rich pay a fair share. We want taxes to ‘discriminate’ and one federal tax expert even told me the entire tax code was designed to do so.  But on what basis should tax allowances support or penalise? 

The state is always walking that line between recognizing behavior and helping those who are  disadvantaged to  reach a level playing field –  and subtly  (or not so subtly)  nudging behavior, favoring some and penalizing others.

My reading of it is that for many years Canadian tax policy has discouraged and penalized women or men who do their care roles in the home. It has penalized them for their preference for family-based care and has pressured them out of the home to earn more . It does this  through its narrow definition of ‘work’, through its tax breaks, through its pension plan criteria and even ironically through its maternity and ‘childcare’ benefits which sound  (to some) like they finally value caregiving. The fact that these ‘benefits’ or ‘allowances’ are also tied to engagement in paid work clinches the deal.  There is a bias in favour of outsourcing care and against parents being able to spend time providing family care for their own children.   It is a bias that should not exist.

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