Rob Salmond in a guest post on Policy Progress gives an alternative approach to dealing with Dunne on income splitting – worth thinking about.
He says :-
There has been much chatter about Peter Dunne’s income splitting Bill. The common refrain on the left, most recently from The Frog and Stuart Nash, has been that this Bill represents yet another unaffordable give away to rich folk, and therefore it should be opposed.
Not so fast. The two oft-cited problems the Bill, its fiscal cost and its distributional consequences, are both fixable. They don’t represent principled progressive reasons for opposing income splitting as an idea.
and later:-
If I were advising the Greens or Labour right now, here is what I would suggest:
- Oppose this Bill as it stands, for the reasons you have already given, in the very realistic hope of giving National cold feet;
- If National does pull the plug on the Bill, then offer Peter Dunne the deal above. I reckon he is more in favour of income splitting than he is against tax increases for the really wealthy, and he may even vote for it in the House in order to express his displeasure with National;
- Watch the proverbial fly within the government. The Bill in that form would likely not fly (NACT 63 beats LPGUFM 59), but it could cause a decent stink for the government on the way down.
I think this represents strategic gain with no dilution of progressive principles. Certainly the parties have step one underway. But will we see steps two and three?
i would defer to your greater knowledge of peter dunne’s principles. as in the fact that he does actually hold to the ones professes to have. i am sceptical on that point though.
based on the fact that the herald is running a campaign on this issue, and whipping up support(albeit only from their readership, for what that’s worth). and given this governments proven spinelessness when it comes to populist reaction. what is the plan if they cave in and vote for it?
not that i am against the principal of giving more couples the chance to give their children the sort of home life we took for granted, and now look back with nostalgia.
Hi
[I've lifted the comment I posted on the Policy Progress blog (one of two) and posted it here. I realised that in addition to the idea of of income splitting being spoken for in the Herald, there's also been quite a lot of other fiscal orientated stuff e.g. on pensions, healthcare, and recently about the affordability of housing. The forces that support National and neocons may be massing prior to the next election.]
A further thought on this question is affordability of housing. Income splitting may have a bubble-inflating effect on prices, at a time when it’s far better to let the price of housing to fall to a meaningful level sustainable by wages/real economy.
I notice in today’s DomPost there are figures based upon averages, medians, and 20% deposits (i.e. 80% mortgages). Elsewhere in the quoted report, it suggest that it takes a single person nearly 9 year to save a 20% deposit. These figures may be fatuous relative to peoples’ real situation and their need for housing, but we really do need to take housing outside of the casino.
Experience from Australia about the readiness to reflate the housing bubble suggests, for example, that the Australian housing bubble burst in the early ’90’s (if I remember Steve Keen’s analysis correctly) only to be reflated immediately afterwards. He calls it a love affaire with credit/debt, and I think he’s right. Though there’s also a good case to suggest that there’s a love affair with the house.
The last thing we want to do is pump up the housing bubble for the banks and their mortgage brokers. This would perpetuate the top slicing of ordinary peoples’ income by finance. Undoubtedly part of the low wages and inequality in NZ.
Remember it’s Dunne’s idea. Monetarist to the last breath. He/they don’t give anything away without expecting the operation of their own version of the multiplier. Reduce the tax base and exploit the ‘gains’ to create vastly inflated bank profits and executive bonuses.
Jim
What were the two solutions he proposes Trevor..?
“Bill represents yet another unaffordable give away to rich folk, and therefore it should be opposed”
Nothing about the inequity that WFF created (giving welfare to the same rich that LAbs rhetoric follows yet actsion undermine the same rhetoric) and this is a(Income splitting) patch to correct this conscious mistakle. I notice from Frog these comments of Lab still following The Great mans philosophy and the inequity that was created.
“WFF (which is based on Roger Douglas’ Family Care introduced in the 1980s – subsequent Finance Ministers have just enhanced it) acts as an effective subsidy for employers”
The Greens were pointing out these problems with WFF five years ago when it was being phased in:
AND
Ms Bradford said the Working for Families package will conceal the fact that many Kiwis are not paid a fair wage. “It’s imperative that the minimum wage is raised to $12 an hour. Working For Families has allowed too many employers to get away with paying their employees a wage that is not enough to live on. Working for Families could be called another form of corporate welfare.”
Either WFF or income splitting displays the poor results that Lab and Nat have achieved regarding livable incomes. Pre mid 80’s a family could live on this sole income, now with 2 incomes we still require to receive govt assistance to get by.
Trevor – Thanks for the link, and glad you think this idea is interesting.
Jeremy – the proposal I make in another part of my original Policy Progress post is that income splitting be funded through a new income tax on incomes over $100k. This makes the Bill fiscally neutral, counteracts the large fiscal transfer in the current Bill, and brings our tax policy back more in line with OECD norms.
Rob, I’m pretty sure your suggestion is what NACT has in find when they talk “neutral”
I don’t agree with Rob’s logic. If you were to increase tax to the wealthiest, then why the hell would you divert the increased tax take to this scheme? Surely, there are policies that have a much more profound impact on economic growth, job creation etc that are more deserving than this. Happy for Rob to call me to discuss.
Stuart
Happy to discuss privately if you like (flick me an email if interested), but in broad strokes:
(1) I agree with you. In government I would not propose this, as I would rather spend the revenue elsewhere;
(2) But all those excellent policies that we would propose in government are not on the table right now, whereas income splitting is on the table. Moreover we have no short-term way to get a “$100k+ tax rate to fund NZS contributions” (or anything similar) package on the table.
(3) I would rather get the $100k+ rate on the books now (it would be a good bridge to have crossed before we get into government), even if it is in exchange for accepting a second-best policy such as income splitting. In my view it isn’t *bad* policy (see my post), only second best. I think that outcome is better and more progressive overall than the status quo. Which is why, in an environment where our choice set is pretty constrained, I think this is worth a go.
rob, how would single parents benefit from your proposals? or is their effort in raising children irrelevant and not deserving of a similar tax break?
Stargazer – As I said over at Policy Progress, I think this package (higher income tax on $100k+; income splitting) should be more about equity between partnerships of all kinds than about valuing children. I would actually like to see some parts of the proposed scheme change to reflect this. Details at Policy Progress.
WfF already does a great job helping families with children, especially when the family has a relatively low income as in many single-parent situations. Indeed WfF is one of the most generous schemes for supporting families in the world according to the OECD, something we should all be really proud of.
So the straight answer your question is no. Single parents would get nothing out of this particular policy, because this particular policy is aimed elsewhere. Single parents typically do not have a partner with whom to split their income. But there are other programmes (championed by Labour, I might add) that do meaningfully help single parents shoulder the very large burden of raising kids on their own.
Can you guys look at this a different way.
We both work, i work 2 jobs and bring in just over 23000 per year total. My wife earns alot more than i do. How is it fair currently that a couple on the same combined total as us pay less tax than us? We know this is the case as we have friedns who earn similar incomes. We dont get working form families as our income is combined to see if we qualify.
I can see the argumnet that the country cant afford to do this, but it just doesnt seem fair that we work as hard, earn very similar totals but we have to pay alot more tax.
Trevor, it would be good if you could correct Mr Salmond’s name in your article.
Done thanks Trevor
Income splitting? I’m in two minds about it
Rob, I think I have a problem with the underlying principle of valuing partnerships. As opposed to WfF which compensates people for the costs of raising children, your proposition rewards partnerships on the grounds of some arbitrary notion of their desirability.
First up, it strikes me as a little perverse to create a fiscal incentive for something that enjoys a strong biological and cultural imperative anyway. And in reality partnerships already enjoy efficiencies that make them financially advantageous, so I’m struggling to perceive why they should attract further advantage.
It strikes me that heavily unbalanced or single income partnerships are at odds with notions of a more productive economy too. To my mind the only compelling case for income splitting is to provide support and incentive for stay-at-home parents which, with apologies to single parents, is a much less arbitrary social good than I’m seeing in your partnership principle.
Fundamentally I see income splitting as a policy that benefits a segment of society that doesn’t need it. Particularly when you’re talking about partnerships. I appreciate that your plan is to make it fiscally neutral by taxation on higher incomes, but that has problems too. In the first place it adds to the imbalance. Consider a +$100k couple vs a +$100k single parent. Surely that outcome under you proposal is at odds with progressive principles?
The biggest problem is that income splitting would be very difficult to put back in the box. As you seem to agree that there are greater priorities for the extra income that would make income splitting fiscally neutral, I cannot see how it could be a policy we support.
thank you SS. take a hypothetical example, which i’ve seen happen many a time. husband has an affair, decides he wants to leave his wife, marries the new person leaving the wife with the kids. husband now gets the benefit of income splitting, without having the burden of child-rearing, while wife gets the burden of childrearing, a much lower income & absolutely no assistance from this policy. i can’t see how this kind of discrimination can be in any way beneficial to those children, or to the abandoned wife. a variation of this scenario is the couple splitting up and the husband getting a wife from overseas who doesn’t/isn’t allowed to work (yes the latter is happening in our country) and is rewarded for this kind of behaviour with income-splitting.
it’s a crap policy, and massively unfair to large numbers of people.
oh, and also, if the first wife in my scenario above chooses to stay at home (which is one of the things that income-splitting is supposed to value?) she will lose the $60 per week in-work-payment, and will have to face the additional pressure of having WINZ constantly on her back, pushing her into work. apparently staying at home to bring up kids is only of value if you have a rich partner. how is that, in any way, a positive signal to send out through policy?
Looks like Stargazer has found a few black holes
Sufi and Stargazer
Thanks for the thoughtful comments. I prefer to think about the idea behind income splitting as “treating like partnerships equally” rather than “valuing partnership.” At Policy Progress (in both post and comments) I have written out some changes to the Bill that would bring it more in line with this goal (namely remove Dunne’s “only with kids” thing, and add in a work test if there are no kids under five). I think these modifications can provide an appropriate incentive for a parent to stay at home with very young children without incentivizing a person with a high-earning spouse from opting out of the labour market permanently. (To some extent, this amendment would also address stargazer’s hypothetical about the cheating husband with the Russian bride.)
My motivating example is of two couples: in the first, one person earns $30k and the other earns $60k; in the second, both earn $45k. I think those couples are qualitatively the same – both involve two people going and making a contribution in the community, and both involve contributions the labour market values jointly at $90k. Yet our tax system (using the new rates) means that those couples’ after tax incomes differ by around $1,500 a year. I do not think that is fair, as it treats like partnerships differently. I think that is a problem worth fixing. I have yet to hear anyone say why it is not a problem. I understand that in some other circumstances an income splitting policy can lead to odd outcomes, and those are certainly worth addressing, but they don’t make the initial problem any less important or worth fixing.
In some of those examples, existing WfF and other policies are designed to help out. In Stargazer’s example involving a women whose husband left her, her new single status and lower family income would entitle her to large increases in WfF payments. And if she did decide to stay home and look after the children, then the Domestic Purposes Benefit – Sole Parent would help her do that (my understanding is that this benefit does not have the same level of WINZ hassling as does the unemployment benefits, but I am happy to be corrected on that). It is true that income splitting does not provide specific help to her, but no one policy can help every person in every situation. Income splitting corrects a different source of unfairness. Governments, fortunately, have more than one policy lever they can pull.
Last I want to address Sufi’s example of a $100k+ couple vs a $100k+ single parent. Sufi says that their experience under my proposal would be at odds with progressive principles. To compare apples with apples, assume each couple has two kids, so they do not attract any WfF payments, and that the couples each earn exactly $100k. Under income splitting, the family of four (couple plus two kids) would be left with $84k after tax, again using the new rates, while the family of three (sole parent plus two kids) would be left with $76k. That outcome doesn’t seem all that repugnant to progressive principles, does it?
While this would not be my #1 (or even #2 or #3) goal if we were in government, I think it represents a chance to correct one unfairness, and place our income tax system more in line with international norms and progressive principles. I think that is not a bad week’s work in opposition.
rob, it’s ridiculous to say that the DPB would be anywhere near as equal to staying in a marriage with a high income earner. the financial disincentive to leave the marriage becomes so much higher if income-splitting were in place. so if someone were in an abusive or controlling relationship, or for example, had a partner that refused to put the time into helping with the unpaid work in the home, would be in an even worse position. that person would be thinking not only of themselves but also of the financial impact on the children, and for fear of making the children worse off, would continue to stay and suffer abuse. and we know that children living in situations of abuse are more likely to grow up as abusers, as well as other psychological impacts.
and i presume you haven’t taken into account the gender pay gap? and the fact that the proportion of women in leadership positions, particularly in the private sector, is comparatively very low. which means that the parent most under pressure to give up her career and stay at home would be the woman. this policy will therefore increase inequality for women, will increase the gender pay gap, will reduce the number of women in leadership positions, will reduce the financial stability and independence of women. if you think that depending is a safe option for her, i’d strongly suggest you read the book “why a man is not a financial plan”, which i wrote about here.
finally, i understand that one of your issues is that family partnerships are treated differently if the couple are earning wages as opposed to being self-employed. your proposal seeks to redress that imbalance, but there is another way of doing the same thing. you will no doubt be aware of the recent court case ruling that professionals who run their business via a company must pay the professional a market salary. this is so that high income earners don’t avoid higher rates of tax simply by manipulating ownership structures. similarly, why not require partnerships or other structures to recompense partners/sharholders only for the work they have put in to the business. if one partner hasn’t put the work in, because they have been busy parenting or have a job somewhere else, they don’t get to have half the profits. that will achieve equality.
if you then want to reward the job of parenting, you do that via WfF or some other fair and neutral structure that doesn’t penalise a parent because they are in the wrong type of family unit. if you want to incentivise entrepreneurship and encourage self-employment, you do that via grants through the ministry of economic development.
what you don’t do is bring in a highly discriminatory policy that punishes people – and you can play with words all you like, but it definitely does punish people, and especially women – if they dare to leave an unhappy marriage.
one other point – if you think people on DPB aren’t under significant pressure to get into employment, i guess you haven’t been listening to anything hon paula bennett has been saying in the last couple of years (from even prior to the 2008 election).
Stargazer
I share your concern to provide people in abusing or unhappy partnerships with the maximum freedom to choose their own path out of the situation. But I think your analysis here is flawed, and overstates the role of income splitting in compounding their struggles. You say that income splitting will, among other things, increase the gender pay gap, reduce the number of women in leadership positions, and ultimately lead to increased child abuse in future generations. I am not persuaded by these claims – I think they stretch long bows beyond their breaking points.
The issues you raise are important ones, and income splitting is not a panacea for them. But it is no Pandora’s Box, either. And I would prefer to find other ways to help sole parents and abused partners that do not, as a by product, discriminate against partnerships in which the partners have unequal earning power.
Rob, I guess my problem is still that I don’t accept your first premise.
So I’m just going to say I don’t think it is a problem. Particularly not a problem that warrants a policy response that builds or compounds other inequalities.
In your example above I’m struggling to see why we would want to spend $500million on reducing the tax on someone earning $60k just because they are in a relationship with someone earning $30k. I understand that you see a perceived imbalance there, but then you’re creating a different imbalance between the person earning $60k in a relationship and the person earning $60k not in a relationship. I find that to be a peculiar shift with a rationale that I still don’t get.
I do get that in your examples there is a disparity between the couples and I get that the disparity is the somewhat arbitrary result of a tiered tax system, what I don’t get is the value of measuring the combined income of the partnership to arrive at the sense of unfairness that you feel.
Your comment that the tax system “treats like partnerships differently” is not really right. The tax system does not treat them differently. It simply does not consider them at all. Currently the core tax system is predicated on the earnings of individuals and their consequent ability to contribute to the national coffers. And there is our impasse I think. I don’t think it is useful for income tax purposes to say that a couple earns $90k, I think it is more useful to say that the two people in a relationship earn $60k and $30k.
What I’m yet to be convinced of, is that couples with their myriad approaches to financial partnership, are a concept we should be factoring into considerations of tax fairness. Maybe when we’ve fixed all the inequalities between individuals and between families…
@Sufi: “Your comment that the tax system “treats like partnerships differently” is not really right. The tax system does not treat them differently. It simply does not consider them at all.”
You’re wrong. This changed when Labour created the WFF tax credits.
H.P. does WFF apply to couples without children then?
He guys, you go into the nuances all you like, My wife any myself and 2 of our friends are in the situation of just over 90K above. We contribute more tax than they do. Im not jealous of them, i just dont see how it is fair when so many things are based on household/ couples income.
You can say all you like about getting things fixed but $1500 per year is $30 per week. This amount makes a huge difference to what you can afford in our current climate.
Hayden, I thought about that when making the comment, which is why I added “core” to “tax system”. You’re right that support and compensation (and I assume some punitive) measures like WfF and Student Allowances do take into account combined income, but income tax remains indifferent to relationships.
Now I could conceive of a case being made for those things that are moderated by combined income to be based on after-tax income to offset the differences that occur in Rob’s examples and Waterboy’s life, but I still don’t think it is a $500million unfairness.
Waterboy, can I ask what things you encounter are based on your household income, because I’m happy to accept that I may just be ignorant of some of these burdens and they are creating an unfairness that I’ve just never experienced. But can I also ask whether you think you, your partner and your friends are getting paid a fair wage relative to what each of you does?
@Sufi @Loota
I’m not one-eyed about this… I can understand the opposite point of view. In fact, I can’t see an incremental solution. Perhaps we need to go back to square one and design a new tax system, because incremental tinkering is killing the fairness of this one. Let’s look at this from another perspective:
The reason people see the current lack of splitting as so unfair is partly due to several measures Labour took to *increase* the taxes of some people (mostly, the addition of the 39c rate), later reducing the taxes of others via WfF. Families with a highly skewed income with one earner over $60k had their taxes increase under Labour, then they saw Labour create *benefits* for people on the exact same income level. It just makes people despair that the system isn’t fair.
I’m not trying to rally against the top tax rate just for the sake of it — I think it’s more important to ensure high-quality government expenditure than just debate tax rates in isolation — but there’s a significant portion of the population who consider that the very idea that benefits are provided to people who are in the top tax bracket *shows the system is fundamentally broken*. It should be possible to support a family and live in Auckland (to a basic level) before you are paying tax at the highest rate.
Frankly, I’d be happiest if it was possible to feed and cloth yourself and contribute towards running a household before the government took any tax at all! The Greens and ACT both support this kind of system.
Back to income splitting. Partly this just is a counter measure to the unfairness I’ve described above, but I agree that it has problems too. Maybe it is just another incremental patch, and we shouldn’t implement it. But if that is the case, other aspects of the tax and benefit system need to change too.
People will always be happier to pay their share if they think that the system is fair. And many people just didn’t perceive the recent Labour system as fair at all. Of course, maybe Labour will hire Gareth Morgan before the 2011 election and propose a stunning revamp of tax that people will rally behind. But I don’t think it will happen. I think it’s more likely that Labour will just try to sell a new top tax rate to those won’t actually have to pay it (for a few years until inflation pushes them into that band), rather than doing the decent thing and trying to sell it to everyone as a truly fairer system. I guess we’ll find out in time.
On a less negative note — I’m really pleased to see Trevor post this. Honest discussion of the alternatives is a good thing.
Yay Trev
This is a seductively good sounding idea…
@Loota: “This is a seductively good sounding idea…”
Yep. I know that I’d be willing to pay a bit more tax in total (I’m fairly well in the top bracket) to see this happen.
Yep, any stunning rethink (of any portfolio actually) which captures the progressive imagination and fires the motivation of Labour stalwarts would be most welcome; a kind of weakly Left of National incrementalism isn’t turning me on much at the moment.
You can say all you like about getting things fixed but $1500 per year is $30 per week. This amount makes a huge difference to what you can afford in our current climate.
Which is why you must surely see how income splitting is grossly unfair to single people. How can it possibly be fair that an individual pays a lower rate of tax than a single person merely because he has a wife.
I’m quite puzzled as to why we want to provide an incentive for one member of a couple to earn a low wage anyway. Its not really a path to a more productive economy eh.