Fallow on Income Splitting

Income splitting is in the news as Peter Dunne has finally got the Government to publish a discussion document on it. For those who don’t want to read the whole 29 pages, Brian Fallow has a good summary of the issues in the Herald:

Broadly speaking, the left is not keen because it is not well targeted at relieving child poverty, the extent of which the Child Poverty Action Group’s report this week makes clear.

Income splitting is no use at all to single parents, who have the hardest row to hoe.

And it is seen as favouring a 1950s model of the family – with mum at home baking biscuits and looking after the children – that bears little relation to the realities of modern times.

At the same time, the right isn’t keen because of the opportunity cost: like any other targeted tax relief, it reduces how much would be left for across-the-board tax cuts.

Fallow also notes that lowering the top tax rates would reduce much of the demand for income splitting. It is that high 39% marginal tax rate that makes income splitting so attractive.

In terms of who would benefit:

The most populous part of the income distribution among couples consists of families whose main breadwinner earns between $50,000 and $60,000 and his or her partner up to $40,000.

About 70,000 families fall into that group and they would stand to gain between $1000 and $3000 a year.

The largest gains, however, would be among couples with larger incomes.

The biggest gain, nearly $9000 a year, goes to a couple where one partner earns $120,00 a year and the other earns nothing.

His conclusion:

Many families are under pressure, no question. But income splitting only benefits some of them and only because of the structure of the income tax scale. Either flatten it or put more resources in Working for Families. But spare us any more complexity in the tax laws.