Sunday, 7 March 2010

income splitting: discrimination against sole-parents

from my professional reading at work (and it's no doubt been in the news as well), i see the IRD is doing work on income-splitting. yeah, it's late ok, and i'm too tired to look for the links.

just in case you haven't heard about this particular policy, it's where a couple get to split their total income between the two partners, thereby reducing their tax rates. it works well when one partner is on a high income, and the other is on a low income. so if one partner earns $80,000 they would be on a tax rate of 38% for income over $70,000. if the other partner earns only $20,000, total family income of $100,000 would be split to $50,000 each, thereby avoiding the top tax rate, and in fact having more of that income taxed at lower rates.

it's been a united (future) policy for years, and the new government has decided to investigate further with a view to implementing. interestingly enough, business nz doesn't support this policy.

i have lots of objections to it, but the one i want to raise here is that the policy discriminates against sole-parents. why should parents who are in a relationship get an extra tax break that sole-parents don't qualify for? especially when we know that sole-parents face greater poverty levels than those in relationships.

i'm thinking there may be a human rights claim here, much in the way that the child poverty action group took a case on the in-work payment being discriminatory to children of beneficiaries. what do others think?

11 comments:

Lindsay Mitchell said...

The CPAG lost their case.

The solution you are looking for is a flat tax. Now common around the world, especially amongst the ex-communist countries. That would benefit partnered and sole parents alike.

Daniel Ryan said...

Currently couples are penalised in many situations. Especially when it comes to any kind of assistance such as unemployment.
If you're single and lose your job you may still be able to pay your rent and eat with government assistance. If your part of a couple you get nothing (unless your partners income is very low), making you entirely dependant and making losing a job much harder on a low income couple than two low income singles.

That said the solution to discrimination is not more discrimination. Worse, this change really only helps the high income couples and does little for anyone else.

Anonymous said...

You are incorrect, Lindsay. The Human Rights Review Tribunal did find the in-work tax credit to be discriminatory. They also decided the "incentivising" of people to get into work was a sufficient justification - but that doesn't stop the law from being discriminatory.

And it's utterly disingenuous to say "oh a flat tax is totally the solution you want". A flat tax definitely benefits sole and partnered parents ... in the upper tax brackets. And I'm not entirely sure Estonia is the country we should be idolizing, economy-wise.

Lindsay Mitchell said...

The Tribunal's decision went in favour of the Crown. Beneficiary parents are still not receiving the In Work payment. Neither should they. The result was a loss for the CPAG.

stargazer said...

just got the following comment by email from a reader:

Another problem is that it gives the biggest benefit to very wealthy couples where one person is in paid employment, and the other doesn't have any paid employment at all. So imagine a situation where one partner is say, a self-made multi-millionaire, so he is independently wealthy, sufficiently so that he can amuse himself with politics for a while, and the other, for whatever reason, decides that she will not work. They would get the full benefit of the income splitting.

Observer said...

***just in case you haven't heard about this particular policy, it's where a couple get to split their total income between the two partners, thereby reducing their tax rates. it works well when one partner is on a high income, and the other is on a low income. so if one partner earns $80,000 they would be on a tax rate of 38% for income over $70,000. if the other partner earns only $20,000, total family income of $100,000 would be split to $50,000 each, thereby avoiding the top tax rate, and in fact having more of that income taxed at lower rates.***

Anything that makes it easier for working couples to have children seems like a good idea. I don't see the objection - could elaborate on what other reasons you have for opposing this?


***why should parents who are in a relationship get an extra tax break that sole-parents don't qualify for? especially when we know that sole-parents face greater poverty levels than those in relationships.***

If that is the case aren't they going to be in the lower tax bracket generally? Although, I agree maybe it could be adjusted so high earning solo mum's pay less tax too.

Sandra said...

Ah. So it is proposed for couples generally, no matter what their family situation? When I first heard of it, I assumed it was for people with children and liked the way that it could have the effect of valuing the work a stay at home parent does. Whether it is worth doing relative to increasing support to the lowest income earners in NZ is another question though. The solo parent aspect is one I had not considered. It does raise questions about equity and the possibility of subbing childcare at higher rates for solo parents. I'm not sure to what extent, if any, that is currently the case.

Sandra said...

I should have added: the notion of income tax splitting to support unpaid care work should not be confined to parenting but widened to embrace care of elderly relatives.

M said...

I haven't thought about this issue so I'm probably going to put my foot in it, but I am at home with our children and my husband earns enough to be in the higher tax bracket. If we could split his income for tax purposes I would be able to stay at home longer with our children. I would love to have that support and value placed on stay at home parenting.
Yes, it will benefit some people who probably don't need it (the very wealthy not supporting dependants as per previous examples) but I can't help but think that problem is a bit similar to government assistance for those at the lower end of the scale: in order to get benefits to those who need it, there will inevitably be some who take advantage of the welfare system and gain unfairly. Neither is a perfect solution, but just as I wouldn't be happy with all benefits being cut to stop the 'bludgers' (for want of a better term), so would I hesitate to say no to a tax break that would benefit families like mine, just to ensure the millionaires don't get anything.

stargazer said...

M, you missed the point of the post. it's not about "the millionaires", it's about sole parents who tend to be considerably worse off financially, and who will be unable to access this tax break. it's about inequity, and in fact open discrimination.

observer, the problem i have is that sole parents with children need as much support, if not more, than "working couples".

and as for the argument that income splitting values the work of stay at home parents (sorry julie, still waiting for that alternative term!), shouldn't the work of sole-parents who stay at home be similarly valued? to the same financial extent and the same length of time? but no, in contrast, sole-parents are treated by society as bludgers (and worse if they dare complain about anything - i'm looking at you paula bennett); they are pushed into work as soon as is possible, and the support systems for getting them into training have now been cut.

not good enough.

Julie said...

Thanks for raising this Anjum - Anna wrote a guest post about it ages ago, and it's timely to raise it again!

I too was quite keen on income splitting, particularly as in our household we have one parent working part time and one full time on a high tax bracket, and it does feel like it might recognise the unpaid work of the lower earner.

But income splitting is a flawed tool for recognising unpaid work. It doesn't, can't, work to recognise the unpaid work for couples in which both fall in the same tax bracket - say one person in that arrangement does all the domestic work there is no tax benefit for them at all in income splitting, regardless. And, as Anjum so rightly points out, income splitting excludes acknowledgement of the unpaid work of sole parents too.

It seems to me that the idea of income splitting is more about validating and promoting traditional ideas about what is (and what isn't) a family. If this proposal goes through it will have the (unintended?) consequence in some families of pressuring women to stay at home to give their partner a tax advantage.

There are other, better, ways to recognise unpaid work, without the negatives attached.