Sunday, August 15, 2010

ZenTiger Income Splitting I

I'm for flat tax before I'd support income splitting, but I thought I'd muster a few simple words of defence of the proposed bill for income splitting, because in essence, it is a very family friendly bill, and worth consideration on that basis alone.

I'll likely do a few posts on this topic over the next few weeks or months if the bill gets feet because lefties will crawl out of the swamp and start worrying about the government not gaining their rightful amount of tax from single income families. Oh, the horror of government not maximising its tax take!

Why is income splitting as a concept being put forward?

Well, the progressive tax system is designed to tax rich bastards a lot more than poor bastards because this is "fair".

With a progressive tax system, as individuals earn more, not only do they pay more, but the percentage they pay increases at various thresholds. In NZ, the top tax rate of 39% kicks in around 70K, and 39 cents in the dollar is remitted to the government as income tax (GST, rates, ETS taxes all kick in later).

So if the reasoning behind the progressive tax system is to set a "fair" rate of tax according to the capacity to pay, then it would seem fair to consider the income of a family as akin to the income of an individual.

Indeed, an individual only has one mouth to feed on their pay, and a family may have four mouths to feed on EXACTLY the same pay, and therefore effectively pay much higher taxes. How is that fair? It violates the so called principles of a progressive tax system by its own standards.

Even comparing families paying tax with other families paying tax creates unfair anomalies: A husband and wife earning $60,000 each will PAY LESS TAX than a husband on $90,000 and a wife earning $30,000 and looking after the kids. So, is that fair that one couple pays much less tax than another? The progressive tax system advocates say its very fair.

Let's try a thought experiment then.

Let's say a couple divorces. Say the husband was earning $120,000 per year and the wife stayed at home and looked after the kids. Why do divorce laws consider that the wife is entitled to half of the assets, when she earned "nothing"?

Or to put it another way - why shouldn't the wife be entitled to half of the income assets when they are together? So why should the government take more than what they would take from each individual in this example, after the assets have been fairly divided?

The husband and wife should be able to split their income and tax burden in marriage as the law demands they split their assets in divorce. That's what progressive tax would support in principle, but does the opposite in practice.

6 comment(s):

ZenTiger said...

PS:

One could argue that the Working For Families programme exists to counter the need to consider income splitting, although I view that as a wasteful, welfare inducing bureaucratic mess that could be dumped if we considered income splitting.

Although, as I said at the start of the post, a single flat tax rate would be much better.

Or if we must keep progressive tax, then adjust the thresholds to kick in around the $300,000 mark, and move the definition of "rich bastard" away from the ridiculous threshold of $70K.

big news said...

That's a good post - well a start. Compare a couple on 90k - the first couple gets 70,000 and 20,000 the other gets $53,000 the other 37,000 - but the one getting 37,000 has three part time jobs where 24,000 of this is secondary tax, and the other has two jobs where $23,000 is secondary tax.

Who pays the most tax? And will income splitting mean that secondary tax is reduced further so that the second couple pays the same tax as the first couple?

Cactus Kate said...

"Let's say a couple divorces. Say the husband was earning $120,000 per year and the wife stayed at home and looked after the kids. Why do divorce laws consider that the wife is entitled to half of the assets, when she earned "nothing"?"

Flawed argument really.

Income tax is on income. Divorce distribution is based on wealth.

A large part of the assets of a NZ household very likely will be capital gains on housing and shares, which are tax free.

ZenTiger said...

Hi Kate. I don't think the argument is flawed at all, because it speaks to the concept of division of wealth (and income is a reflection of that).

It also spoke to the basis of the fairness argument that progressive tax makes around capacity to pay high taxes based on higher earnings, but that isn't the case if higher costs are not taken into account (ie 4 mouths to feed rather than one mouth to feed)

Perhaps families should be viewed like companies, which only pay tax on profit, not income?

big news said...

Income is not always a reflection of wealth. Neither is wealth always a consequence of income. If it was the poor will be poor and the rich will be rich based on income alone.

That's not reality. Many factors, not just income, contribute toward wealth.

ZenTiger said...

I obviously need to clarify.

My argument about income splitting is made speaking to socialists using the same values they define "fairness" in a progressive tax system by. I'm suggesting things that they would presumably need to acknowledge, if not agree with rather than them simply reject income splitting as a concept.

I wouldn't bother arguing for income splitting to right wing economic people because they would more likely find more resonance, and more sense, agreeing with a flat tax system, rather than a progressive tax system.

On the other hand, I think Key will ultimately reject income splitting simply because he would wish to protect his tax base, and be satisfied reducing the top rate will be enough.

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