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.