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Income splitting – all bad?

Written By: - Date published: 11:41 am, August 25th, 2010 - 26 comments
Categories: tax - Tags: ,

Woe betide those who attribute a single opinion to The Standard, I thought I’d offer a contrasting opinion with Marty.  I had to use his image though – I think the Dr Who look is priceless.

I like Income Splitting as a principle, but, as Marty has pointed out on more than one occasion, it tends to have bad outcomes in practice.  I don’t wish to fund tax cuts for the rich any more than he does.  The thought of Bill English deciding what needs to be cut to fund it terrifies me.

But I do think that the practice can be adjusted to fit the principle.

I like the principle because, in particular, I think it is very valuable having a parent home for the early years of childhood and, in general, it is good for people to be able to afford to do volunteer and community work.  Those not in paid work are often the glue that holds society together.  I don’t like the practice as those on $200k+ can fund their partner’s volunteering on their own shilling (or more likely on their employees’ shilling).

So how can we make the two fit?  The bill is coming (even if it may well not get to law), so we might as well see how it can be best shaped.

I suggest that the income that can be transferred from one tax bill to another be capped at the average income.  Partner earns $100k, and you earn $10k from your part-time job?  You can transfer it to $35k (average income) for you and $75k for them.  That way you’re not getting a better than average deal, and the tax savings are focussed on those earning less.

My other suggestion comes from Policy Progress: tie the increased cost to a tax on incomes over $100k.  Aotearoa’s tax rates for those earning over $100k are the lowest amongst rich countries, there’s plenty of room to move.

(Hat-tip Trevor Mallard for the policy progress link; and whilst we’re there, yes, you were first to break the Heather Roy story.  Enough kudos for you?)

If one needs to reduce the cost further (and I’d suggest that’s only if it’s not funded from an increased $100k+ tax rate), then focus it where it’s really helpful: on those with school age or younger children.

Let the attacks/reasoned debate begin…

26 comments on “Income splitting – all bad? ”

  1. Bright Red 1

    I think there’s real merit in a tax/welfare system that consistantly views either everyone as an individual or says the household is the basic economic unit. If you were to rebuild the system from the bottom up and wanted to think of the household as the basic economic unit, income splitting would be part of that. But, as formulated, it’s just a hand out to the rich that will have to come from cuts to the social wage.

    I agree that if you were to fund income splitting from a higher top tax rate – looks like an extra 2 or 3 cents on income over $100K would raise the $500 mil a year needed – then that would remove much of the objection to income splitting.

    • Lanthanide 1.1

      I believe the average income is $48k, or at least that’s the figure that Key liked to tout re: the “north of $50/week tax cut for the average wage”. Median income is ~$37k.

      I like the idea of capping the transferrals up to the average wage, which would be $48k in my mind. That seems fair enough – a couple on $100k would split to 48 and 52, vs the currently proposed 50/50, and someone on 140k would split to 48 and 92, vs the currently proposed 70/70.

      Also the tax rate over $100k would be nice, but National would never take a back-step there, particularly as many of those earning over that amount tend to be older with grown children so wouldn’t be eligible for the income splitting (although most would probably be using trusts to achieve the same or better result anyway). Labour has said that when they get in they will be looking at a top tax rate to replace the one that the Nat’s just cut, and that it’d be at least 100k, so that’s probably the best we can hope for. Really Labour could do both – new tax rate and income splitting, vs National just income splitting.

      • Bunji 1.1.1

        Sorry, got my stats from the statistics.govt.nz website, not that nice man Mr Key. A little over $35K would have been median income (not wage, that’s a few grand lower, income includes investments etc) to June 2009. Mean income obviously takes into account inequality as those earning $7mill a year skew the whole statistics. But as a floated idea, somewhere around median/mean income would be good anyway.

  2. KJT 2

    I said that a while back. Income splitting would be a good idea if it was kept to a capped amount.
    45% tax on incomes over 150k is the same as OZ and would pay for it to be tax neutral.

    Though a guaranteed minimum income for each individual may be a much better idea. Cut out the plethora of different benefits and simply administer it through IRD.

    I fail to see the point of tax payers paying for child care so that a parent can work for, mostly, minimum wage. Only to be replaced by a paid childcare centre.

  3. lprent 3

    Woe betide those who attribute a single opinion to The Standard…

    Yep, I tend to land on them like a ton of refractory bricks (with a high silica content). I’ve never quite understood that particular bit of stupidity by (usually) the right-leaners. Bearing in mind the number of times that authors do disagree with each other in part or whole it seemed a bit daft. Eventually I came to the conclusion that it was a very good indicator of a troll just trying to denigrate the site, and acted accordingly….

  4. I can’t see why income splitting should be allowed. All it does is shift an extra tax burden on people with a different lifestyle choice (i.e. childless couples and singles with and without children).
    What’s more, current tax laws consider other “family” units as economic units, i.e. you can’t go on a benefit if your partner has an income. Why not tackle that instead? It would affect many more people beneficially.
    As an aside, when your child leaves home at 16 and gets an independent benefit your income split disappears and you certainly have to start paying far more tax?
    And can we make income splitting dependent on keeping your children in school, at a desirable weight, unpregnant and out of jail?

  5. until you can find a way to do income-splitting that doesn’t discriminate against sole parents, and gives equal value to parents who stay at home on the DPB, then it is bad. there is also a gendered aspect to this, in that it’s much more likely that women will be the ones under pressure to give up their careers and stay at home (given the gender pay gap and dearth of women in leadership positions, particuarly in the private sector). the partner who stays at home, if they work part-time, will be under pressure to not take a pay rise. i’m sorry, but this policy is just bad.

    • Lanthanide 5.1

      Under pressure not to take a pay rise? How do you figure that?

      With income splitting, if the person on the lower income gets a pay rise, it is effectively taxed at the marginal rate of the other party. But more money is still more money – would you rather have an additional $10,000 pa that was effectively taxed at 30% instead of 17.5%, or not? Sure, this is a ‘disincentive’ to get to work, that the right likes to go on about people not being incentivised to work because of the high tax rate, but I’m pretty sure there wouldn’t be any undue pressure from the partner in this kind of siutation.

      captcha: avoiding (what, exactly?)

  6. Ari 6

    A fixed tax credit for part-time workers with children or full time parents would make more sense than income splitting, I think. Having it scale in any way with income is just a way to turn it into class warfare, so fixed as opposed to capped should be the way to go.

    If that sounds a bit like WFF to anyone… well, what a coincidence. 😉

    • Herodotus 6.1

      That is why some like myself are supportive of income splitting because WFF does not treat welfare and income as the same
      even though there is an inherent error in the Labour welfare system that disadvantages one form of a family. $100k single income family pays $8.45k more tax than a family with 2 $50k incomes, and both can qualify for the same WFF benefit even though one family has to survive on this $8.45k less than the other. This applies to any 2 income families whereby the 2 earners are on dirrerent tax brackets or having only 1 income. WFF (Welfare) is unfair to many families as the welfare system does not look at disposable incomes until this occurs we require tax system to take this into consideration.
      UROSKIN I can’t see why income splitting should be allowed. All it does is shift an extra tax burden on people with a different lifestyle choice (i.e. childless couples and singles with and without children). Does not any support system by a goverment creat this same issue. This sounds a wee bit of the far right policy of the Libertarianz.

      • Descendant Of Smith 6.1.1

        The sole parent issue to me is simply a red herring. A sole parent doesn’t have two people to feed, house, clothe, put aside for superannuation.

        When commenting on this in an earlier post I did suggest that this should be funded by higher tax rates on higher incomes but their may also be savings as other have alluded to in child care subsidies as well as DPB where it would be more attractive to formally establish a realtionship where one party is not working.

        Those that criticise the nuclear family neglect to opine on the evidence that children need males figures in their lives. I’m the last person to come at this from a religious point of view or a white middle class male point of view and have no intention of doing so. What was quite evident to me in the late 80’s when income splitting was removed and other financial pressures went on families.g. high interest rates, that it was the financial pressure that finnaly stove in people’s relationships.

        This may not be the neatest mechanism for helping one income families but it is a positive way of helping and doesn’t require people to front up and be considered a beneficiary which quite frankly pisses a lot of people off.

        Universality (as with Family Benefit) is much less divisive and does stop people being played off against each other which is something the right love to do. Taking that destructive weapon away is not a bad thing.

        As for having children being a lifestyle choice I want to puke every-time some wanker says that. It’s not any more than not having children is a lifestyle choice.

        What you really mean is that only the rich should have children.

        • Herodotus 6.1.1.1

          Universiality (as with Family Benefit) is much less divisive and does stop people being played off against each other which is something the right love to do. Takking that destructive weapon away is not a bad thing.
          I think that this facit of politics is not limited just to the right.
          No one has commented regarding what direction do we as a society wish to support, and with that what we are willing to subsidies in economic terms with govt policy. We dont seem to want to assist the trad nuclear family of extended familt scenario, but are willing to pay for the ambulance at the bottom with broken families. Should we not have a discussion what is the optimum situation and support that, then those families that are unable to attain that for any reason to support in other means, and how is this and other govt initiatves to be funded regarding tax and what is appropiate for consumation tax, coy tax and at what level does the top PAYE tax structure take effect. Atthe moment the top tax rate still hits families at a level that many believe is stll just a livable wage, otherwise why are we supporting these same families with the likes of WFF?

        • Rosy 6.1.1.2

          Going from two incomes to one due to a chronic illness (no, not lifestyle-related) and not being eligible for invalid’s benefit or ACC to make up the difference means income-splitting would be awesome and recognise the burden on the working partner as well as the need for some sense of worth for the now-at-home partner. Oh, that’s right, no dependent kids so it’s just another thing that the partnered long-term ill/unemployed will miss out on.

          • Descendant Of Smith 6.1.1.2.1

            I’ve never argued that income splitting should only apply to those with children. I think it should apply to all and people becoming unwell and consequently reducing earning capacity is a good example of why it should apply to all couples.

    • Bunji 6.2

      Hmm, you make a good argument Ari. Maybe we should focus on a guaranteed minimum income, altered according to number of dependants. I think some left-wing thinker had some principle of “everyone contribute according to their ability, and take according to their need”?

      Even so, I would prefer it if not everything had to pass through the state. It seems more efficient to just keep the money rather than hand it over to the state to get it back again. It depends on how statist one is willing to be I suppose.

      To stargazer I’d say that the DPB is exactly there to help solo parents. Making sure that is at a good rate to give those parents choices in raising their kids is important. But there is no way the state is going to be able to give them a life-partner to make the task of raising their kids easier; that doesn’t mean we should penalise those who do have that family unit.

      • Descendant Of Smith 6.2.1

        I’ve also posted previously that Labour should hang it’s head in shame for not re-instating the $20-00 per week taken of beneficiaries – but re-instating it for NZS, particularly as NZS already had a higher rate in the first place.

        Re-instating that $20-00 and removing youth rates for benefits would be a good start to lifting those incomes.

      • stargazer 6.2.2

        how is asking them to pay their fair share of taxes “penalising” them? what you’re advocating for is a discriminatory policy that privileges a couple over single parents, and more than that, privileges couples where one partner earns a high income and the other doesn’t. if you want to support parents, have a policy that supports them irrespective of their family structure and gives more income to those who need it more eg WfF.

        • Descendant Of Smith 6.2.2.1

          privileges? all depends on perception doesn’t it.

          A couple on one income has to support more people on that one income than a sole parent on the same income. Making that a little more even is a privilege?

          Maybe for the sole parent we could save money on the dole queue by having them take in an adult and provide for them. That way the sole parent wouldn’t be privileged by not having another adult to support.

          All assistance and taxation is discriminatory in one way or another, as are wages – same job different town different pay rate.

          Obviously the solution to ensure no-one is privileged is to pay everyone the same wage and tax them all the same amount.

  7. no, the solution is not to design policy based on marital status. and i\’ve not heard anyone saying income-splitting should be restricted to families with one income.

    but let’s say we take your point, what if the sole parent has more mouths to feed than the couple, because of more children in the household? using your logic, we should then put a few people from the “dole queue” into the couple’s home, or what? it’s a stupid assumption that a couple on one income has more mouths to feed than a sole-parent on one income.

    • Descendant Of Smith 7.1

      I thought it was obvious I was referring to more adults to support as opposed to children and nor did I indicate that policy was restricted to one income only. I used that example because I have genuine concern for people who are on one income.

      Referencing my earlier posts it’s also clear that it’s not just about feeding – it’s about the long term costs of supporting a partner, who may not be able to work for a range of reasons including raising children with disabilities or through illness , including making provision for retirement for both yourselves and your partner.

      Of course another solution may be to lift the minimum wage to a level where a family can be supported on one income but I suspect that is less likely.

      Nope much better to have the couple separate due to financial pressure, have one work and pay child support and the other on DPB. Much more cost effective.

      Do you not notice that the big increase in DPB occurred through the 80’s when wages reduced, interest rates went up, overtime and penal rates disappeared, income splitting and universal family benefit disappeared, individual contracts came in, clauses in pay conditions such as additional allowances for supporting a family if your wife didn’t work vanished – you know things got so individualistic and un-family friendly that we somehow seem surprised that we reaped what we sowed.

      Make it easier for all families but don’t make them have to apply for a benefit like WFF – leave the benefits for the most needy – people hate applying for stuff in that way.

      • stargazer 7.1.1

        sorry, but i didn’t say that i’d prefer a couple to separate due to financial pressure. i said that people should be getting support for parenting regardless of marital status or personal family situation. people don’t just split because of financial pressure, and there are plenty of single parents who aren’t on the the DPB – 2 in my place of work that has 10 people. what about the sole parents who are under financial pressure? because they aren’t in danger of “splitting”, they don’t deserve an equal tax-break?

        as for more adults to support, i don’t see how a sole-parent with two teenage kids (or say an 8 & 11 year old) should deserve less of a tax break than a couple with a toddler. as for your “long-term costs of supporting a partner” – once the kids have left home the other partner can get a fulltime job right? so what’s life-long about it. and as i understand the policy, the income-splitting stops when the kids reach a certain age.

        make it easier for ALL families who struggle, not just the select few where one earns a high income and the other doesn’t. every family deserves financial stability.

  8. Descendant Of Smith 8

    Fine to have a different point of view I’m not going to labour the point..

    “people don’t just split because of financial pressure”.

    I don’t know if you were around in the 80’s paying 22.5% on your mortgage having originally borrowed at 6% – to 9%, having lost all penal rates and been moved to a lower wage when you had to apply for your job back but I can find you lots of people that separated due to financial pressure.

    I don’t know how we held it all together (probably cause I’m so nice) but there are plenty of people who didn’t.

    Any casual searching of any counseling / marriage guidance / divorce websites will tell you that financial pressure is one of the leading causes of separation.

    • Blondie 8.1

      As a single working parent, I find it offensive that I would be paying higher tax than another wage-earner on exactly the same income if this income-splitting bill goes through.

      I believe firmly that people should be entitled to the rewards of their labour, regardless of marital or relationship status. To be honest I also have concerns with the equity of WFF – but I feel much less resentful that my taxes might go to help poorer families through WFF, than if they subsidise wealthier families through income-splitting. If I’m going to be forced to donate to other families (through taxes), I’d much prefer my taxes go somewhere that there is a genuine need.

      The nonsense that some people spout about single-parent families arising due to financial pressures – are they really so silly as to think that rewarding two-parent families by way of tax cuts, will eliminate marriage break-ups?

      Newsflash: many relationship break ups are due to non-financial matters, such as infidelity, arguments, boredom, sexual dysfunction, violence and abuse, interfering in-laws, mistrust, poor communication, etc, etc. If social engineering is the true objective of this bill (which it appears it is), bribing couples to stay together by way of an income-splitting tax cuts won’t help to address the real issues.

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