Income-splitting headache

Q. Regarding taxation differences between those with and without children, the modern, highly interdependent welfare state fully justifies child support via subsidies or taxation relief.

The children of today become the welfare providers of tomorrow, not just for their parents but also for those who did not have to meet the costs of raising children.

A fair and overdue policy to strengthen and acknowledge the family as an essential partnership would be splitting the family income 50/50 between the husband and wife in families with children up to the age of 16.

A. Not so fast. You might think such a policy would be fair, but many would disagree with you.

To keep the numbers easy, let's suppose Mr Happy earns $80,000 and Mrs Happy is a full-time housewife and mother to two young children.

Next door are the Two-Earners, also with two young ones. Mr Two-Earner makes $30,000 and his wife makes $50,000.

Under your proposal, the two families would pay the same tax. Yet both the Two-Earners have to work to bring in their $80,000. I doubt if they would call the tax system fair.

And how about Mr Widower down the road, making $80,000 and raising three children? He has nobody to split his income with, so he is stuck paying a full $6330 more in tax than the Happies.

That's a big extra burden to add to the difficulties of raising children alone.

Then, across the street, there's Ms Single, with no young children, also on $80,000. Why shouldn't she pay higher tax?

Perhaps because she is supporting an ageing parent or two, or a disabled adult child.

Another issue: what happens when the Happy children reach high school, and Mrs Happy is keen to use her qualifications by taking a part-time job, earning $20,000.

Under the current system, she would pay $3630 in tax.

But under your system, her income would be added to her husband's, giving us $100,000 to be split between the spouses. Total family tax would increase by $6600. Effectively, Mrs Happy would be paying a third of her income in tax.

Such a high tax rate on a low income will hardly encourage her to work. The country might lose her skills.

There are so many different circumstances. The minute the tax system starts to help people in one set of circumstances, it hurts other, sometimes more deserving, people.

* * *

Q. I wonder if it should be pointed out to some of your correspondents who feel the families have it too good that the household income is what should be taxed.

I believe that our social responsibilities should be acknowledged and catered for by all facets of the our social structure. So you would probably say I am a socialist.

I feel that a young family person with two children and one stay-at-home person to look after them should be taxed as though they are earning on behalf of four (for that is what they are doing), and so split four ways for the purposes of taxation. (The working person's income is not theirs alone but the income of the family group.)

When the children are older, let's say the other partner decides to work while the children are at school - but is only able to work part-time so as to be there when the children come home.

Then I believe that their joint incomes should be combined for tax purposes, so that they are taxed on the basis that the combined income is for four.

I feel it is important (but really right through the maturing process, especially in children's teenage years) that someone is in the home when they are home.

Background: I'm a fairly old joker who didn't pay any income tax until I was a journeyman working more than 45 hours a week.

Everyone paid 1s 6d in the pound Social Security tax. There was a tax exemption for a wife and lesser amount for each child.

Does this idea have any validity?

A. Certainly it does. But it, too, has its problems.

Extending income splitting to include children would help our Mr Widower in the previous answer. It could also help Ms Single, if we included all dependants, not just children.

And, given the way the numbers would work in most cases, it wouldn't be so discouraging for Mrs Happy to take up part-time work.

But it would still leave the Two-Earners paying the same tax as the Happies.

And what about divorced parents who have joint custody of children? Would they both split their income with their kids? Or would each claim half a child?

We might even find people having more children just to get the tax break - or at least claiming that they have more children. Do we want Inland Revenue checking on family numbers?

Another worry about your suggestion and the one above: the people who would be helped most are those on higher incomes. Surely they need less financial help than others.

And the lost revenue would have to come from somewhere, probably from higher tax rates generally. We might well see the Two-Earners' taxes rise, so that the Happies get a break. Is that fair?

Perhaps the biggest worry of all: the changes would make our tax system considerably more complex.

Those who have lived elsewhere know that New Zealand's tax system - at least for the majority of people - is wonderfully simple.

In the US, for instance, everyone spends many tedious hours each year filling out a tax return.

Let's not make changes that would bring that practice here - especially when the changes might harm as many people as they help.

PS. Before I get deluged with letters debating the importance of mothers being at home with their children, I want to say that that's getting rather beyond the scope of this column.

* * *

Q. Among all the "spleen-venting" last week, one of your correspondents did not object to their taxes being spent on "subsidised childcare, free education, free healthcare, the DPB".

Ummm, subsidised childcare only if you're going to the "right" childcare facility. Education is not free, there are hundreds of dollars of "donations" and extras required.

Healthcare is not free. My four-month-old has to pay $12 a visit in Porirua (Helen has quietly dropped that wee "pledge"). The DPB is being ruined by those that rip it off.

The correspondent also didn't mind their taxes going to "working families with children in terms of accommodation payments, family support, child tax credit, family tax credit and parental tax credit".

I am part of a working family with children but I get no accommodation payments, no family support and none of the tax credits mentioned. We're not eligible for those.

We did get paid parental leave but not at the same level as the income my wife has given up.

Remember, I'm paying the same taxes as your correspondent. Maybe they could send me a few cheques?

A. And perhaps not. Presumably the main reason you're missing out on most of this assistance is because your income is too high. Which brings us back to the same old question: how much support should the rest of the country give to middle and upper-income families?

There's no easy answer.