Tax policy colloquium, week 7: Lisa Philipps’ Gendering the Analysis of Tax Expenditures: Bridging Two Solititudes in Canadian Tax Policy

This past Tuesday, Lisa Philipps presented the above-titledpaper, happily the day before (rather than that of) our hideous Nor’easter. I was unable to post the next day, as I usually do, due to the crush of other obligations, but now, from a sunnier realm than NYC, here are some thoughts about the paper and topic.

The impetus for the paper (co-authored with Isabella Bakker) is as follows.  Canada’s executive branch, which one might say (without reckless exaggeration) is at present somewhat differently directed than our own, has begun disseminating gender-based analysis of budget measures.  But tax expenditure (TE) analysis and information reporting have not similarly changed.  So the paper’s main impetus is to argue that gender-based analysis of the impact of Canadian TEs would offer a worthwhile expansion of publicly available information and knowledge.

The paper then offers preliminary analysis of various TEs as officially listed and measured. What makes this technically feasible is that Canada has separate filing by married couples. So access to the data permits one to say, for a particular TE, X amount has been claimed by men, and Y amount by women.

Among the pertinent items on the list are childcare and dependent benefits, a child care expenses deduction, and narrowly tailored tax credits or deductions for volunteer firefighters, clergy, police, and members of the military. Also, alimony deductions (and presumably exclusions, as under U.S. income tax law for pre-2019 divorce agreements). And also, pension-splitting.  Under this one, half of one’s pension payments can be reported in taxable income by one’s spouse, rather than by oneself, if both sign an agreement to that effect, without regard to whether said spouse has a legal claim to said half. This is commonly called income-splitting for pensions, in the same sense that, under the U.S. rules, having a joint return in which all relevant dollar amounts (such as tax brackets) are double their levels under individual returns may be arithmetically equivalent to separate returns with income splitting. (The key point here, of course, is the effect of progressive rates.)

Anyway, here are some of my thoughts on the topics raised by the paper:

1) What is a tax expenditure? – The paper takes the government’s official listing of TEs for granted, which is perfectly fine given its purpose of expanding public knowledge regarding the gender impact of various tax rules. But this is a pet topic for me that I have written about elsewhere. In brief, I think the only way to make the term analytically useful or meaningful, in the context of income taxation, is as a way of distinguishing between purely allocative rules (the clear TEs) and those that are part of the distribution system’s doing its job. For example, it would be hard to argue reasonably that solar panel tax credits are an aspect of figuring out who is better off and who is worse off. Rather, such a feature of an income tax would have to reflect (as a matter of plausible rationales, and even if in fact it was passed to reward campaign contributors in the solar panels industry) an allocative aim of affecting people’s energy choices.

From this perspective, many of the items that the paper discusses – for example, the treatment of alimony or marriage or pension benefits within the household or children – really aren’t reasonably labeled as TEs. Even if also reflecting allocative effect and intent (as they well might), they are also a part of how the distribution system “decides” to distribute tax burdens between individuals based on household information about them.

But none of this in any way leans against the paper’s analysis, which takes the official TE list for granted. Indeed, the fact that none of the household-related items are TEs, if one accepts my view as to how thate term is best used, does not in the slightest detract from the importance of analyzing their gender impact.

2) Incidence issues with respect to tax expenditures – The paper takes advantage of the fact that, because Canada has separate filing by married couples (along with information regarding the filer’s claimed gender), one can actually figure out, by gender, who is claiming particular tax benefits. In the US, joint returns would make this impossible from an available data standpoint. But there are still (as the authors acknowledge) incidence questions regarding benefit. E.g., suppose a man in the 40 percent bracket makes deductible alimony payments to a woman in the 20 percent bracket.

Case 1, she is being conned (e.g., as he has better legal representation) and she gets the same amount they would have agreed to had they structured so that it wasn’t called alimony and was neither deductible nor includable. (This is feasible under U.S. income tax law for pre-2019 agreements; I don’t know whether Canadian law makes this any harder.) Here the economic incidence equals the nominal incidence – benefit to him, ost to her.

Case 2, this is mutually well-advised tax minimization. Given the tax bracket differences, her periodic receipt is adjusted upwards by between 20 and 40 percent, relative to the case where the payments would neither be deductible nor includable. In this scenario, both are better-off by reason of the tax treatment.

It’s an empirical question, and one that cannot be answered via tax return information, which of these two cases is more representative in practice, at a particular time and place.

3) Joint return vs. separate return – I increasingly feel that, for analytical purposes, it’s confusing rather than helpful to distinguish between the “joint return” and “separate return” approaches. (This is not to deny, of course, that, if one is making a concrete political proposal, using the terminology may be essential.)

Case in point, joint returns with double for all the dollar amounts can be the same as separate returns with income-splitting (i.e., half of the total income reported on each return).

Here’s what’s of greater interest: (a) the use of what I’d call “household information” (including income of other household members, the # of mouths to be fed, etc.) in determining taxes and/or transfers for any individuals in the household; (b) what for now I’ll just call “the rest” (administrative and filing aspects, legal liability with respect to claims made, etc.)

I tend to be less instinctively predisposed than the paper’s authors to put legal ownership to particular items at the center of how to think about what’s actually going on (for tax and transfer purposes) in a particular household. But agreed, that stuff can matter, and indeed a lot, depending on the household’s (hard to observe) internal rules and power relationships.

4) Secondary earners – Often in a couple, whether married or not and whether or not recognized by tax or transfer systems as a couple, there will be a “primary earner” and a “secondary earner.” This is not just a function of who is earning more this year, but of who is more definitely tied to engaging in taxable market work. When a given couple has a “secondary earner,” that individual tends to be much more tax-elastic with respect to labor supply than the primary earner. Among other things, this may reflect said individual’s capacity to perform valuable non-market and hence non-taxable services, including taking care of the couple’s children (if any) but also anything else that takes time and effort.

Secondary earners’ greater labor supply elasticity (where present) provides a standard efficiency reason for taxing them at lower rates. But of course in a U.S. joint return, if the primary earner will be working in any event and the question is whether the secondary earner will choose to do so, such individual’s first dollar of potential earnings may already face a high marginal tax rate, because the couple is taking for granted that the primary earner will be earning $X and thus running them at least partway up the marginal rate ladder.

In response to this problem, from 1981(?) to 1986 the U.S. federal income tax system offered a secondary earner deduction. But this was repealed in 1986, on the rationale that it was both too costly and no longer necessary given flatter marginal rates. (But of course, if it hadn’t been necessary it wouldn’t have raised significant revenue – hence these two rationales were inconsistent with each other.)

Anyway, I think secondary earner deductions should be back on the table as an important possible change to current US federal income tax rules. Note, they needn’t require retaining joint returns if there is sufficient cross-reference between spouses’ “separate” returns.

Secondary earner deductions have the potential to be both efficient and horizontally equitable. Efficient because they respond to the possibility that the secondary earner, by working, is forgoing tax-free imputed income. Horizontally equitable, because two couples with the same net taxable incomes are not in fact similarly situated if one has two earners in the workforce and the other just one. The former evidently has both a lower current wage rate and less time available for tax-free yet valuable home production.

There are lots of design questions around reinstating the secondary earner deduction. But if it tends to offer greater benefits higher up the income scale than lower, other adjustments can be made to retain the vertical burden distribution that one wants. Note also that, while I’ve followed past practice in calling it a secondary earner “deduction,” it might also be structured as, say, a flat percentage credit.

5) Other U.S. fiscal system bias against two-earner couples – The fact that the secondary earner has taxable income upon working but not upon staying home is only one way in which the U.S. fiscal system both discourages secondary earners from working and disfavors two-earner households. Other important aspects (and there is a huge literature on this – I’m just referring here to issues that are very well-known in some circles) include the design of Social Security and Medicare, both of which discourage work by secondary earners and disfavor two-earner couples relative to one-earner couples.

6) Childcare expenses – One needs an integrated response to all this, but the question of how the tax system should treat actual or imputed childcare expenses is another huge topic that I don’t think the U.S. system currently handles very well. And this of course goes well beyond just the tax system or even the fiscal system, to include broader issues that might conceivably be better handled through “spending.”