Myth – income tax splitting will allow New Zealand families to make choices around working versus bringing up children.
Reality. Income splitting financially benefits the wealthy but very rarely the great majority who actually need assistance.
Part of the supply-and-confidence agreement between Peter Dunne and the National party is National supporting tax legislation around income splitting. I questioned English about the possibility of income splitting legislation when he appeared before the Finance and Expenditure select committee recently, and he pretty much ruled it out. Not surprising, considering the cost is estimated by the IRD to be around $500m per ann.
When I questioned Dunne at FEC a couple of weeks later, however, he cited the supply and confidence agreement. Earlier press statements seem to suggest that Dunne is serious about pursuing this course of action.
So, does income splitting actually help those who really need it: those who are torn between going back to work fulltime, working part-time and/or staying at home to look after children? (Dunne’s proposal is only applicable to families with dependant children).
The simple answer is no. Working for Families is in place to help struggling families. Dunne suggests keeping both. The median household income is about $60k and the median wage is around $32k. Therefore, many households have both parents working full-time now and would not benefit from an income splitting regime. Those families who genuinely do have a ‘choice’ around whether one or both parents work, tend to be those who earn the most – makes sense. ‘Choice’ implies a level of economic freedom: necessity does not.
How would income splitting benefit kiwis on different salaries? Outlined below are three scenarios (assuming a two parent household with at least one dependant child): ann salary $40k, $100k, and $140k. JK’s tax cut figure is $$ in the hand per week before GST, ETS, inflation etc. IS = income splitting. This is also a net figure from the IRD’s calculations in a 2009 paper. The actual figures will have changed slightly under the new tax thresholds, but you get the point….
$40k – JK’s tax cut – $23/wk + IS $23/wk = $46/wk
$100k – JK’s tax cut – $69/wk + IS $163/wk = $232/wk
$140k – JK’s tax cut – $108/wk + IS $200/wk = >$300/wk
So you see. If income splitting is to go through (and I very much doubt it will – but we will watch with interest as Dunne and Key/English fight this one out), once again, those on the highest salaries will be the real benefactors. Also remember that around 70% of Kiwis earn less than $40k. Even English admits income splitting is not well targeted. Would have to agree with him just this once Mr Dunne.
Should be interesting. Don’t think the higher income earners will be “benefactors” though. Bennett might become a beneficiary if she can split her income.
Firstly, a point of order. National only agree to support Dunne’s income splitting proposal to select committee as part of his CaS. They are doing that, but may not (won’t?) back it further. This isn’t a CaS problem. Anyway, on with the main comment:
This is the problem with the incrementalist approach to tax rates we’ve had over the past few years. Everyone compares changes with the exact present tax structure, rather than looking at what is actually fair. I have some experience with this — Iast year I was made redundant from a relatively well paying job. We have three young children, and rather than go back into another well-payed-but-long-hours job, my wife and I were fortunate enough to be able to job share. That mean we both get to see the kids more. However, the other benefit is that we pay far less tax. We can earn more than $10,000 less, and still get the same amount in our hands.
Why is this gap in any way fair? There is the same about of total work, but a hugely different amount of tax. Of course, most people can’t make this choice to arrange their work this way, it depends a lot on the kind of work you do.
I agree that income splitting can’t be implemented with other tax changes — but given that almost all benefits are tied to your partner’s income, it seems grossly unfair that tax is not.
On a more general note, Labour need to realize the income required to support a family differs widely throughout the country. When they added an extra 5c in the dollar of marginal tax of those supporting a family in Auckland and earning $60k — hardly the super wealthy — the moment they came to power, they hurt a lot of people. I’m tired of Phill Goff talking about tax-cuts for CEOs, when it’s ordinary people affected by these policies. Without getting too Dale Gribble about this — it seems like you just don’t care about us. We’re not “your people” or something. I’m not inherently anti-Labour — but you just don’t seem (as a party, I mean) to get that your approach to taxing the middle class is *the* major obstacle for many people in supporting Labour. It’s not just about absolute tax rates, it’s about the perceived fairness of the system.
Thanks Hayden, you make some interesting points: yes, Nats will only support Income Splitting legislation to committee stage, but this seems like an absolute waste of time if we go through the process of select committee submissions etc in the knowledge that it will go no where.
Do also agree re perceived fairness. 60k with a family in Akld is not wealthy at all. This is also Phil’s message. Why give CEO a tax cut of $1000/wk when there are 1000s of New Zealanders who really do need assistance but are not getting it. My belief is that assistance through tax cuts, tax credits etc must be given to those who really would benefit; not those to whom it makes no difference. Stuart
Why is no one supporting tax free thresholds, that give everyone equal tax relief..?
Does Labour really believe a student earning $14,000 a year should be paying tax..?
Phil Goff is a good guy, you should meet him!
I was talking to Hayden.
Hi Stuart,
Actually, I don’t have a problem with income-splitting as a matter of principle. We already legislated to give out WFF tax credits on the basis of family income not personal income, based on the idea that the unit of analysis should generally be “people” or “families” rather than “earners.” If we apply that principle – our own principme – consistently then family income should also determine the initial (pre-credit) tax bill, and therefore the net bill as well.
The way you have written it here, it seems you are suggesting a Labour principle that we oppose to anything that provides any money to rich people. That is a principle I am not willing to sign up to.
The workability of Dunne’s proposal is a different issue. You are dead right that it is expensive. But one way to account for the $500m is to implement offsetting changes to the top personal tax rate (about 3c would do it), or to change the imputation system for dividends etc. This would leave high earners with non-working or lower waged partners roughly where they are, would give low earners with non-working or lower waged partners more, would increase taxes on other high-income folk, and would be consistent with our WFF principles. Now if English and Dunne aren’t prepared to make it fiscally neutral and properly targeted in this way, then probably we should oppose the legislation they propose. But there is a way through with this that is consistent with Labour principles and values, if they are willing to take it.
I would be interested if somebody could explain why, as a matter of principle, the tax bill (net of WFF) should be different for the following two families:
1. One earner $60k, one earner $30k, three kids;
2. Two earners $45k each, three kids.
Under our current system, they get pretty much the same WFF grants as far as I can remember, but their initial tax bills are different. I just don’t think “because the first individual person earns more” is much of an answer.
- Rob
jeremy , absolutely yes, students should be paying tax.
beneficiaries on lower incomes do. ( its taken out before they recieve it)
I’d argue that beneficiaries shouldn’t pay tax, if they earn under a certain income threshold…
Also what a ridiculous thing to have IRD and WINZ staff doing, calculating how much tax the government should take out of government funds…
@Jeremy — I actually agree with this. A high tax free threshold seems economically efficient, and provides a simple mechanism to adjust tax for inflation over time. It doesn’t change the incoming splitting problem much, though. It could make that problem more noticeable depending on the exact threshold and rates.
@Spud — he probably is. Maybe I’ll get the opportunity one day.
@Rob — nice. You said it better than me. And your example resonates better. I know I’d rather pay a higher top tax rate and have income splitting.
jeremy , they have computers that work it out on a grand scale.
The ‘tax free threshold ‘ is really only a benefit for the rich
The list MP for Labour is going to do so well in Ohariu opposing income splitting. Good timing though with the World Cup; it’s a bit of an own goal.
So tax cuts benefit the rich, income splitting benefits the rich, tax free thresholds benefit the rich..
Should everyone just earn the same amount or something
How does this fit in with the newly created (extended) anomoly between Trust/Highest tax income threashold and the company tax rate?
It seems to me that by putting company tax 5% below the two highest threholds, the move will now be to companies rather than trusts? Problem not solved at all?
@GWW, I think you think anything, any government does is only for the benefit of the rich…
How is charging those on the lowest salaries no tax while keeping the progressive system for those higher up a benefit for the rich..?
Must be tiring hacking away at those poppies all day long…
I agree, I have yet to get a decent, well any, answer on why increasing the lowest threshold where tax kicks in is not equitable?
I think a tax free threshold is a good idea. It would provide decent tax relief to low income earners. Reactionaries like GWW just think tax cut is ipso facto for the rich. The greens support a tax free threshold of $10,000:
Jeremy its elementary. TFT say $10,000.
For person on $12000 they pay tax on the $2000. For a person on $150,000 that means they only pay tax on $140,000 . Those rates at the top end are much higher than the rates at the bottom.
QED benefits ‘ the highly paid’
GWWNZ I finally get what you are saying. For a while there thought you were losing the plot.
Under today’s tax rates and with a TFT of $10K you are saying that the high income earners now get an extra $10,000 moved out of the 38% high hit tax zone.
Now that would be the case if things were defined such that the TFT of $10K was no longer considered income.
I would have thought in your example that the person earning $150K p.a. would still be considered to be earning $150K per year, not $140K per year. All other thresholds and rates remaining the same. So the high earner should have an identical tax reduction to the person on $10K p.a. in absolute dollar terms.
There is no other way around it , its a TFT for everybody or it isnt a TFT !!
we have a tax rate of 12.5 up to $14,000 for EVERYBODY. And then 21% and 33%.
There was a low earners rebate when the minimum rate was 18c
Exactly what I imagined Loota and in proportional terms the overwhelming benefit is for those on low incomes. A person on 12k p.a would go from paying 12.5% on the full 12K to 12.5% on 2K. That’s a large amount of tax relief to low income earners.
Whatever the scheme maybe I would expect most people here to support tax relief for those on low incomes already so heavily burdened by the state.
@GWW This is getting off topic, but you misunderstand how a TFT functions (at least any I’ve ever heard of). They work exactly like the lowest tax band currently does, but with a 0% tax threshold. To prove this to yourself via a thought experiment, just lower the bottom tax rate from 12.5% to 0% (purely as an example — I’m not proposing this exactly) and calculate the change in total tax for any salary greater than the end of that lower band. It’s the exactly the same number of absolute dollars, regardless of what total salary is. [Of course, you have to *raise* taxes in some higher band to make this fiscally neutral].
Im not sure how teh tax cuts will help my family, but income splitting currently would.
My wife earns close to 65ish, I work 3 jobs curently and combined earn about 24000.
We have friends on combined less than us but both similar wages , though a varietly things like wff, different tax rates due to secondary tax etc they have more take home actual income than us.
Yet our total combined income is higher than theres.
Income splitting would help us.
Remember that although my wife is in the high wage bracket im well in the low income wage bracket.
We are not rich, we are frugal, hence why we tend to be labour supporters.
It would be good to hear from Stuart or DC on why they dont support the TFT idea
I would support income splitting. I earn $55K, that supports a family of 5, yes we get WFF of $185 or so each week as well, that really helps. For almost everything, WFF, Family Support, community service cards etc etc, the total combined income of by my wife ($0) and myself have to be added together, yet we are taxed as just one person. If I could split with the wife, (full time Mum and homeschooling our middle child) then we’d be better off and it wiould accurtaely reflect that one income is supporting 5 people.
I can see how combined taxes helps those at the top, but it also helps an awful lot of Middle NZ.
I can see alot of problems in implementing something like this, but on a purely selfish line, an extra couple of thousand in the hand would help alot.
Not my intention to drag this out too much, but I wanted to make one last point. Unlike lowering the top tax rate, incoming splitting can only decrease the tax base by a finite amount. After your household income is twice the threshold of the top tax rate, there is no further benefit.
Stuart — this is shown in the example you picked (probably deliberately, but the point wasn’t discussed yet). At $140k (2x the $70k top tax threshold), maximum benefit is reached. So even in the most extreme case of one partner earning all the income (which probably isn’t typical) income splitting only provides $200 a week extra. If you’re making a $1m a year or more, you still won’t get any additional benefit from it.
So it seems to me that income splitting would have benefitted middle income couples with skewed earnings more than reducing the top tax rate.
Of course, I accept we can’t afford to make this change in isolation — the last thing we need is to increase the deficit further. I also accept that there are problems with various edge cases for income splitting. But saying that it’s too difficult to do anything about, or even saying that it’s not efficient in terms of administration, is different from saying that it’s not theoretically fair.
As lab is not in favouir of income splitting, how then do you reconcile the fact that govt assistance e.g WFF is based on a gross income level for the family and tax is by the individual, as has been commented on and i am sure that you and others within your caucus are aware of that families receiving the same gross income the same goct assistance yet can recieve greatly differing cash in the hand. The differences are caused by the tax that families of one income pay to similar tax of multi earners, and displays yet again how Lab and Nats undervalue stay at home parents.Or is it that you believe that a single income family has a lower cost structure than a multi income family and thus should beable to survive on a lower income level yet in all other aspects the families are the same?
Herodotus, the payments are also based on the number of dependent children , and their ages as well ( teenagers being more expensive to raise than say 6 yr olds)
ghost, yes thanks but for my misguided examples these for 2 families the family makeups are consistent with one another.
Try by using families 2 children 16-18 yr olds familiy income $80k, single income and double income $40 each. All other benefits from the govt are (In work and WFF) single income family pay $19,950 tax leaving After tax before benefit of $60k, tax on $40k = $7.21k so the family pays tax of $14,420 so has $5.5k more disposable income.
No one has been able or willing to comment why both families get the same assistance from Gpvt yet the single income falimy has $5.5. less to live on?