More losers than realised from income sharing
When I die, I hope that over my lifetime I’ve paid more in taxes than I’ve got back from the government. That’s because people who do it the other way around — getting more than they’ve paid for — have often led tough lives, with long periods of unemployment, illness or disability.
It would be great if those pushing for Peter Dunne’s income sharing bill “because everyone else gets a tax break” would ponder the deal they get, along similar lines. Should they be lining up for a government handout?
Giving tax breaks to everyone isn’t even logical. If that happened and the government were to continue to offer the same services, it would simply have to raise basic tax rates, and we’d be back where we started.
The irony is, though, that many people expecting to gain from Dunne’s bill won’t get anything.
Under the bill, couples with children under 18 could choose to be taxed as if each person earns half the couple’s income. If one spouse makes $100,000 and the other zero, it would be as if they both made $50,000 — leaving them $7,880 better off.
The idea is to support couples in which one person has no job or a part-time job, so they can stay home with their children.
The biggest winners, who will receive around $5,000 to $9,000 a year, are couples in which one person makes $80,000 or more.
Who are the losers? Everyone who gets nothing, because income sharing would leave less government money for their needs.
This obviously includes people who don’t have children under 18. It also includes single parents and couples that separate during the year. As Dunne points out, some of these people receive other government assistance. But still, the pot from which that assistance comes will be emptier because of income sharing.
Other losers include not only couples with children whose incomes happen to be roughly equal, but many whose incomes are quite different — perhaps because one is working part-time to look after children. If each partner earns between $14,000 and $48,000, or if each partner earns between $48,000 and $70,000, income sharing offers them nothing — because the two partners are in the same tax bracket. Where’s the encouragement for them to stay home?
Some further issues to consider:
- Let’s compare the Smiths, with one partner earning $80,000 and the other nothing, with the Browns, who both earn $40,000. It seems likely the Smiths will have an easier life — with one parent free to do child minding, housework, shopping and so on. Does it make sense for the Browns to support the Smiths?
- Encouraging a parent to stay at home looking after children isn’t always good for the children. Research varies on this — and it clearly depends on circumstances and attitudes. But New Zealand children might, on the whole, be better off if the money went instead into superior child care.
- Could the parent who stays at home end up worse off? It can be hard to restart a career after a big gap, and many a mother has regretted this if her marriage breaks up later in life. Is it good to encourage one spouse’s financial dependence on the other one?
I’m not saying the Smiths are necessarily better off than the Browns, or that kids and parents are necessarily better off if the kids are in day care. But all of these issues are debatable.
Given that simplicity is a great characteristic of a tax system, I can’t support a proposed change that might cost $450 million a year, and add complexity, without clearly making life better for most New Zealanders.
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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.