Editorial: Change tax system, not the dole

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Over the past 30 years or so Western economies like ours have become based on the two-income household. Since the 1970s, when married women began to move into the paid workforce in large numbers, the general living standard has risen to a level that couples can afford when both are earning an average wage. A second family income quickly ceased to be a matter of choice, it became imperative if the household was to afford the lifestyle of those around it.

Thus there may be a case for compensating a household when one of the earners becomes unemployed in the current recession. Two Auckland economists have called for a relaxation of the rule that refuses the dole to a person whose partner is earning even a modest income. They point out that this is inconsistent with the taxation system which treats couples as separate income earners.

They have not drawn the obvious conclusion, though, that a better solution might lie in changing the tax system. If couples could combine their incomes for a tax assessment, and each be taxed for half of it, the loss of one income would reduce the tax on the other, delivering an appreciable benefit to the household.

This proposal, known as "income splitting", deserves consideration for reasons wider than unemployment.

If it was adopted as a permanent feature of income tax it would be fairer than the present system for couples in which one partner chose not to be in paid employment.

It would be a way of recognising the value of unpaid work in the home and allowing one partner to stay home with a child. For these reasons alone, you would think income-splitting would appeal to compassionate policy makers. Yet it seems to have little support beyond one independent MP, Peter Dunne, and he has not pushed it very hard.

He made it a condition of his support for the previous Government that it commission a discussion paper on the subject. Though Mr Dunne became Revenue Minister the paper did not appear until last year, Labour's last in office, and it asked whether income splitting was "the best way to provide additional government support for families with children?"

Helen Clark dismissed it as a benefit for the better off. It is true that the higher a household's income the greater its tax reduction, but only up to a point. Couples who are both earning in the highest tax bracket have little to gain by income splitting, nor does a household with a single earner on an income of twice the top tax threshold.

Labour was not inclined to give a tax benefit to the moderately well off and perhaps also feared that income splitting might be a disincentive for women to pursue an independent career. Neither concern haunts National to the same extent and Mr Dunne, Revenue Minister again, has the new Government's undertaking to introduce legislation for income splitting sometime next year.

However, National is not committed to supporting the legislation beyond a first reading and chances are it will decide it cannot afford to lose some revenue. But if unemployment reaches a serious level and pressure builds to provide the dole to those whose partners are still earning, National might consider income splitting a better option.

It seems preferable to introducing new anomalies to the benefit system, which would happen if the dole or some equivalent was not paid to all non-earning partners in a marriage or cohabitation.

There are good reasons to retain the expectation that partners will look to each other, not the state, for income support, and equally good reasons for the state to recognise they are an equal partnership for tax purposes. If Mr Dunne is serious, he will find good cause in rising unemployment to give income splitting more urgency.

- NZ Herald

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