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.
Progressives around New Zealand rightly lauded the previous government’s move to consider family income, not just personal income, in determining net taxes. This idea lies behind the Working for Families package. A family with a two kids faces the same costs, whether both the parents earn $40,000 or one earns $25,000 and the other earns $55,000. The Labour-led government recognised that, and made good progress on fixing the earlier inequities through Working for Families tax credits, which are based on family income.
Income splitting works on the same idea. Just as the two families sketched above face the same costs, they also make the same qualitative contribution to our country. Why, given their broad equality as families, should they have an after tax income that differs by around $900 per year? Do we really want to be penalising couples for having unequal individual earning powers? I cannot think of a family-friendly, progressive principle that supports this distinction. I would love to see comments defending this as an issue of progressive principle rather than practicality.
Having sketched out a simple theoretical case for income splitting, I do agree the current Bill has consequences that progressives should oppose. The current proposal is so bad that even Bill English calls it “badly targeted.”
Income splitting would cost around $500m each year, and there are many other good ways to use that money. As much as income splitting is a broadly good idea, I’d choose contributing to the NZ Super Fund over income splitting every time. That is an even better idea. I would also choose early childhood education subsidies, GST reductions on certain goods, or keeping our public services strong over income splitting.
Given that it is Bill English, not us, who will ultimately choose what gets cut to fund income splitting, we should be very concerned.
And the current Bill does represent a fiscal transfer. The money comes from [somewhere to be decided by Bill English later], and goes largely to wealthy families with one earner. The family that does the best out of this Bill is one where one person earns $140,000 and the other person earns $0. They gain by around $9,000 a year. Compared to the other family above, they have 75% more income and 900% more tax benefit. One recent estimate suggested that over half the benefit from this Bill go to families making over $120,000 a year.
High-income earners in New Zealand will shortly have the lowest top tax rate among rich OECD countries, and the lowest overall income tax burden as well, so it does seem a bit over the top to cut $500m worth of [something Bill will announce later] in order to give them another tax break.
As the legislation stands, these two practical issues would overwhelm the in-principle attractiveness of the proposal for me, and I would vote against it.
Both of these problems, however, are readily solved through amending the Bill.
The amendment would pay for the $500m cost of income splitting by instituting a higher income tax rate on incomes over $100,000. (This would bring us back into line with tax practice in almost all those OECD countries we like to measure ourselves against.)
The fiscal transfer would then travel away from wealthy folk without low-earning spouses, and travel to wealthy-folk with low-earning spouses (and also to non wealthy families with unequal earnings to a lesser extent). And the government wouldn’t be able to use income splitting as an excuse for any further cuts.
I would vote for that deal. (If it were up to me, I would also amend it to exclude the “only if you have kids” provisions, because there is already a good programme for providing tax credits to families with children, and the principled arguments in favour of income splitting don’t require the distinction. But that is a second order consideration.)
I’m sure a legislation-guru can correct me, but once a Bill with fiscal implications has government permission to be considered by the House, I think the House can consider it and amend it freely. So the amendment would be technically doable. Even if it weren’t, it would be fun watching Gerry Brownlee fumbling around to try and throw it out.
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?
Links:
- Peter Dunne’s backgrounder on the income splitting Bill
- Labour’s presser opposing income splitting
- Greens’ blog post opposing income splitting
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A native Wellingtonian, Rob Salmond now lives in the US. He is Assistant Professor of political science at the University of Michigan, and is also currently a Visiting Scholar in the department of political science at Stanford University. Rob’s academic areas of interest include legislative institutions, political media, and political economy, all with a cross-national focus.
Tags: income-splitting, Peter Dunne
Fundamentally, this is a question of a) what is the appropriate unit of taxation, and b) how do we achieve horizontal equity between these units?
Treating individual as the sole tax unit doesn’t make a great deal of policy sense, but at least it makes good administrative sense.
But your WFF example highlights the complexity in trying to achieve horizontal equity between families. Do you progressively tax families based on the total income? Average income of each earner? Number of kids? They’re all fairly arbitrary measures, but I’d argue that average income of each earner is the most arbitrary of the three.
If the policy aim is to acknowledge the social value of families, then isn’t it the presence of kids – not the presence of an additional non-earning partner – that matters? Rather than income splitting, perhaps we should be income *combining*. To an extent, isn’t that what what WFF does by taking household income into account?
Keith raises some really good points. No surprise there.
On a different tack from Peter Dunne, I would want to cast this policy as recognizing the social role of partnership rather than of families with children. I would let WfF do the work on families with children, and let this policy do the work on partnership. So it would not matter to me whether the partnership was heterosexual or homosexual, had kids at home right now or not. There are all kinds of social value tied up in partnership, some of which we recognize in other parts of the law, and that seems a decent reason to make the partnership the unit of analysis here. Certainly I agree this is not the simplest solution in terms of administration, but I’m not a strict adherent to Occum’s Razor when it comes to social policy.
Considering Keith’s point of income splitting vs income combining, I think you could really do either, but you would have to have a different tax rate schedules for combined incomes and single incomes – it makes no sense to tax a couple earning $100k the same as one person earning $100k. Maybe in this case simplicity would lead you to average the incomes rather than combine them.
Speaking of contributions, I think (in retrospect) I would also prefer a 20hr/wk work test on the income splitting tax credit in cases where there are no children under five. I think that is fairly similar – though not identical – to the WfF setup. A partnership – in which there isn’t a full time job waiting at home – that chooses to only have one member directly contributing in the labour force is qualitatively different from a partnership where both partners are out there serving the community around them.
To be sure, this is not the simplest or most elegant solution. As Keith says getting to horizontal equity is rarely elegant, but I think it is worthwhile to strive for it anyway.
But Rob I’m confused.
Your argument seems to be:
1. It’s fine in principle, but it costs money.
2. That’s money I’d rather see spent elsewhere (i.e. this is not a priority).
3. In order to make it pay for itself we should offset it with a rise in other taxes.
But 3, only makes it neutral, it still doesn’t deal with the opportunity cost you raise in #2. Surely the logical conclusion is if the government/Labour are willing to raise taxes we return to point #2 and the higher priority things we’d spend that income on….
Just for completeness, here are links to Stuart Nash’s original Red Alert post on this issue from last month, and also my comment on that post (which is fairly consistent with the argument I’m making here):
http://blog.labour.org.nz/index.php/2010/07/04/exploding-tax-myths-part-8-income-splitting/
http://blog.labour.org.nz/index.php/2010/07/04/exploding-tax-myths-part-8-income-splitting/comment-page-1/#comment-80200
Hey James
If we were in government, you are right that this wouldn’t be at the top of my agenda. I would much rather see a taxation and spending package that did more to prefund NZS, did more for kids in kindy, and so on, and that is where I would want Labour to send the proceeds from any new tax rate or changes to dividend treatment.
But we have no say over the agenda at the moment. None of those excellent policies are on parliament’s docket. But income splitting is. So I’m reacting to an environment of severely constrained choice. And in that environment, my view is that a New Zealand with a new high income rate and income splitting is better than the status quo. When the choice set later expands, then we can make better choices. But I reckon if there’s any opportunity to grab at a potential improvement while in opposition, even if it isn’t out #1 priority, then we should try to take it.
Put another way, there are only opportunity costs if you have lots of opportunities. We don’t.
Cheers – I get your point.
Rob
A new higher earnings tax rate sounds good to me. Ramping up the tax rate gets tax revenue which can have excellent economic effects. More money for families with kids on low incomes also sounds good. Making this a priority sounds even better. Cutting GST sounds lik a good idea too. Supporting greater contributions to the Cullen Fund – great.
That still leaves a need for government stimulus to the economy – enough to increase employment and concentrate resources on the demand side. Controls over speculation and the banks (look at their profits!) – excellent. Both can lead to increases in the revenue gained from taxation.
Tax cuts that flow to people in partnerships sounds like it will satisfy very few of these priorities. Certainly, you may be able to engineer discofort for National, but I’m not sure that ordinary people will appreciate that as a positive gain. Many like National and recognise a cute parliamentary sparing when they see it.
More broadly, recent evidence from Australia may suggest that some/many people over there don’t understand that Rudd’s response to the current crisis was good and beneficial. They don’t understand the core issues. I’ve not heard much from Labour that suggests that they’re going to do something about that over here in NZ. That would be winning hearts and minds and get us out of the rut created in the ’80’s.
There’s too many skeletons in the closet at the moment.
Jim
If one partner earns $55,000 over two jobs split 60/40, and the other earns $25,000, but $15, 000 in one job and $10, 000 in another, that family gets no extra Working for Families payments to compensate for secondary tax
Will horizontal equity via income splitting apply to those taxed on secondary tax, or will they get less net income after tax splitting than other son similar gross incomes purely because of their tax type?.
Jim – Like James, you absolutely right that a progressive Labour government should have many things higher up the priority list than income splitting. My point is that I think the income splitting / new tax tier proposal I made is better policy that we have now, and therefore worth supporting from opposition. Would the public see it as just parliamentary shenanigans? Possibly, depending on how it is handled on all sides. I think it would also be entirely possible for the Greens and Labour to avoid that impression if they were actually genuine in their offer to Dunne of a quid pro quo.
Dave – You make a good point about secondary income. I had not thought through how that would work. That would be a good topic for discussion at the select committee stage.
Hi
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
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