I have taken the most unusual step of reposting a blog I wrote a couple of months ago on income splitting. This is because as of 16th August (apparently) income splitting is back on the legislative agenda. Unbelievable. Would have thought that $500m/ann would be better off spent on creating jobs and economic growth rather than handing it back to those who are about to receive a big tax cut anyway. Is this an admission that there simply is no plan except give money to those on high incomes? Certainly appears that way.!
As the IRD noted in its report on income splitting “it might be perceived as unfair that the benefit from income splitting increases as primary earner income increases, providing more benefit to couples with higher incomes”
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 3 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.
I think Dunne loses his seat to your party at the next election aqnd I’ll be suprised if National includes it in the next budget…
Income Splitting is just a sop to upper middle class earners. Which WFF is as well – with two kids you still get WFF payments up to $80k of income.
WfF should be reworked anyway, with the example of two adults, one baby, one income earner if they are earning.. .
$38,500 PA they get net $704 per week
$42,000 PA they get net $711 per week
$50,000 PA they get net $722 per week.
Difference between $38,500 PA and $50,000 PA is $18 per week.
This is because their WfF drops off as their income increases, keeping people in a hole even if they are working harder to earn more.
I’m confused
I think your arguing the wrong point, Stuart. Since you’ve reposted this material, I’ll repost the best response from last time (from the well reasoned Rob Salmond):
“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.”
Maybe you’d like to answer it this time?
I don’t understand how can you possibly argue that WFF tax credits, and almost every benefit test, are fairly based on household income, while still arguing that income-splitting is fundamentally unfair? Surely things should all be one way or the other? Note that I understand we can’t afford it at present without making other tax changes that won’t be made for now. If we did implement it, it would seem to be likely to cause the top tax rate to rise (as Rob Salmond noted last time). I’d be OK with that. I want to know why you seem to fundamentally object to it.
Because I’ll tell you how your opinion comes across. It comes across as “Family (1) in Rob’s example deserve to pay more because there’s someone on a higher income in the family, and Labour just don’t like that.” I’m sure you don’t think that, but it comes across that way. In some sections of the population, your position is even interpreted as “Labour doesn’t want people to choose to stay at home with the kids for a few years” — and there are more Dale Gribble versions than that!
Arrg. I do know the difference between “your” and “you’re”. But my fingers don’t.
You have to look at income splitting as being a move away from disincentives to living in stable relationships.
I have no idea whether it can be afforded fiscally but rather than a small reduction in the top rate the $500m cost sounds completely sensible.
Higher earners pay more tax, get over it.
The perverse incentive of the DPB destroys relationships. Income splitting will tip the balance back towards lower income single earner couples staying together. And that is a HUGE benefit to society.
Where do you address that?
This article by Simon Collins back in January is actually a pretty good overview, in that it tries to summarize the position of various individuals and groups while arguing that the system should be consistent one way or the other.
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10623121
I lean towards option (2), but I can see the argument for option (1) as well — just not the mix and match.
A little off topic, but I note with interest that ACT and the Greens have a more similar position on tax than either of them would like to admit
(Actually, they used to have a similar position on civil liberties, too, before ACT gave up being Libertarian to become just right wing). They both argue that a tax free threshold makes sense, because why tax someone who’s not making enough to survive.
The real issue of course is where the 500m+ is going to come to pay for this. If there is a subsequent drop is WFF for these middle to upper income earners then fair enough. If there isn’t it is a joke in a time where the economy cannot afford such tax cuts that are so poorly targeted.
Not to mention the discrimination against couples/singles based on marital status and their ability to have children.
Think of all the couples who cannot income split because they actually cannot have children? Another kick in the guts for them.
Politicians seem to forget how expensive it is to live as a single person. If anything high earning singles should get a tax cut for the many years of paying for SOCKs (some other c’s kids).
CK makes a very good point. If Income Splitting is used as the first step in winding back WFF then it has a lot of merit.
sagenz I missed your very good comment when I went through the first time. I also missed out the adjective `insidious’ when referring to WFF.
families on $80k one with single income(PAYE tax $19,950) the other with 2 on $40k PAYE tax $14,420 i.e $5,520 difference in take home pay . WFF and tax credit $100/week for both. YET one household receives $5.5k more, and both receive the same financial welfare from the govt. And this situation is equitable??
It just displays the lack of appreciation past govts have towards one form of a family unit than to other forms that exist. Well Stuart how would you set govt policy to not disadvantage one form over others as current policy does?
Remember Mr Cullen created this anomaly of overtaxing this form of a family structure, or is it that Lab believes that for a stay at home parent (Those ones who donante their time in the likes of parent help) it takes $5k less to survive on?
http://www.listener.co.nz/issue/3432/features/5517/the_mother_myth.html
Herod. maybe you should do your calcs per full time hours worked e.g.
Single income, one parent working 45 hours/week making $80K
Twin income, two parents working 45 hours/week ea making $40K
Then you tell me who seems to be getting the fairer deal out of the two
Remember in the single income instance you have one parent who has an extra 45 hours per week to do something else in
Not bad for just $110 per week less take home pay difference eh?
It means that the family who works a total of 90 hours a week makes just a buck 20 cents extra for each of those hours worked, away from their family.
What do you think? How does that work in to your calculations of “FAIR”?
Loota, how does the $80 k salary works 60 hours and the to $40 own coy and split incme total wotk 50 hours. So work 80 and get less money is that fair. We can all come up with situations that on the surface push one form over the other. Perhaps if someone within Lab could come out and inform us of how much a family requires to live on then we could get some rational in policy setting. Also that you can be within the top 5% of income and STILL receive WFF.
tax is based on the individual welfare is based on family income the 2 are not compatiable, yet Cullen and others did not want to face up to aligning the 2.
What I’m saying is that any proposed income splitting legislation will create its own set of inequities.
In the above instance you give, if that income splitting is through a self-owned company and it is not ‘real’ through two real and separate roles but on paper only then the IRD can and should hammer down on it using existing regs.
It doesn’t require a new system which primarily advantages atomic families with high income single earners.
Loota – the vast bulk of people are paid on PAYE but you make an excellent case for genuine income splitting for all.
It would not be hard for a small owner operated company to quite legitimately split income with current rules.
Cactus. children are the future of our society. They will work for the companies that will pay the dividends to fund your retirement. When you can demonstrate that a society full of single people without children can perpetuate itself you might have a point worth arguing.
You also failed to mention the couple on 50 000 a year from one income because Mum stays home to look after a mentally handicapped kid. With the very generous $75 odd a fortnight disability allowance.
Or the couple on $35000 where the Dad stays home and they really struggle because they believe in giving kids a good nurturing start in life.
Or the people who would like to do this which there are many.
Most of the couples on lower incomes I know are both working out of necessity, not because they want to.
Income splitting would be a lot of help for these people.
The ones on high incomes are both working because money and possessions are their first priority.
This is a good idea. Good ideas are good no matter who suggests them.
Once the principle is established then we can work on people being treated as separate entities for benefits.
Copied from my post in the Standard. http://www.thestandard.org.nz/more-tax-cuts-for-the-elite-coming/#comment-240968
45% tax on incomes over 200k like the Aussies.
“CK makes a very good point. If Income Splitting is used as the first step in winding back WFF then it has a lot of merit.” That’s creepy
Loota.
A small business owner can legitimately income split at the moment if his wife does the accounts etc.
Quite a reasonable case you make KJT, considering that I’d go for income splitting on the portion of combined income up to say $50K.
That way the system will benefit everyone, but will make sure that the lower income will benefit just as much as those on higher income.
The one negative I see is that it financially incentivises coupledom even more, and singles are an ever increasing demographic who will get nothing from this.
And I would suggest, a 45% tax on combined incomes over $200,000.
I do not think it is unfair to singles. They benefit from children who grow up to pay taxes and pensions as well as those who do have kids, without the costs of paying to support their kids on a day to day basis.
They miss out on the pleasures of having their own kids and grandkids too of course.
KJT,
Not really. IRD will expect her to justify her wage. If she is earing $60K for ten hours per week wor, she would have to be a top notch accountant.
I do not have a problem with a tax on combined family incomes over 200k.
Being one of the “rich” I have never had a problem with paying my share so long as it is not used for election bribes a-la Muldoon.
Agreed 60k would be over the top, but as most small business. I.e. Tradesmen, shopkeepers only earn about 60k. 20k for helping in the business, dealing with customers etc is easy to justify.
Well KJT as long as the time and the job is actually being done, no probs.
Anyone trying it on for a laugh to claw back a tax dollar or two should be canned by the IRD however.
“Cactus. children are the future of our society. They will work for the companies that will pay the dividends to fund your retirement. When you can demonstrate that a society full of single people without children can perpetuate itself you might have a point worth arguing”.
Sage – garbage. The correct statement is SOME will work for companies and NONE will fund my retirement. Superannuation being a ponzi scheme that by the time of my retirement will be completely unaffordable and have collapsed.
As for the last that is trotted out, again, sustainability is the key to breeding. The best thing a person can do for society (the world) actually right now is to go adopt a child from Africa or a third world country and give it a better life, rather than breeding their own. Can’t see that catching on in NZ however.
Anyone trying it on for a laugh to claw back a tax dollar or two should be canned by the IRD however.
As should those who go overseas to earn a good income on the basis of an NZ education paid for by us and then think they should not have to pay back the small proportion they were charged a a student loan.
I have to say, I sometimes wonder what is going on, you used to be able to go to uni for $200 fees a year, I can’t help but think that the younger generations are getting so ripped off by the older well established ones (who went through cheap themselves and then took those benefits away). Soz for the off topic.
Agreed
Loota. Those low fees were paid for by very high taxes on the majority of us who did not go to Uni while rich peoples children used the low fees to allow them to infest the ski-fields. Then they still went overseas or overcharged us for their services.
Cactus – you have demonstrated that you can borrow resource from another society, but you have not demonstrated you can replace labour. I could not give a deleted. Clare where you put your money and was not suggesting a super scheme (was thinking direct investment) but if you choose a farm or residential housing or any fantastic investment you care to name you will get no return when there is nobody to work there. That is the unanswerable point about a society supporting its future by ensuring the population has children.
The problems of Africa will be solved through trade not kidnapping or buying their children.
Sage – stop adding to the myth of breeding to sustain older generations in retirement. In developed countries it makes much more financial sense to allow more highly educated immigrants into the country to support super. They are a sure thing – not like the benefit generations being bred now with the bright and best leaving the country.
As a single person who doesn’t want to breed, I’ve already planned for retirement and don’t need breeders little darlings to support me. Give me back my money so I can invest it in the country I wish to retire in instead of wasting it on benefits like WfF, free medical care and education for breeders offspring.
So you took the benefits of the NZ education and health system as you grew up, and now you are able to you want to take the benefits of the system away from others?
OK, I see where you are coming from.
Hey Dupka,
You’d hate the country even more if we had a generation full of Cletuses
Dupka – So we all stop breeding and allow smart Asians and Africans to immigrate to do the jobs New Zealanders eventually grow too old to do. In what sense to you see fertility lower than replacement as being a myth in Russia or Germany?
Loota says:
August 16, 2010 at 8:20 am
The parent staying home looking after children is working. Usually a lot more than 45 hours a week. Why is it a good idea to substitute child care. Paid for by taxes for a parent who does it largely for free. Commented on it here also.
http://blog.greens.org.nz/2010/08/16/dunne-and-dumber-income-splitting-back-on-the-agenda/#comment-145044
Extending paid parental leave to at least six months is a more equitable and cheaper option than income splitting. It will actually make it a genuine choice for parents of all income levels to focus exclusively on raising children in those precious early months.