Tax: Income Splitting Bill Has A Doubtful Future
August 26th, 2010
Peter Dunne has finally managed to get his income splitting Bill into Parliament but it’s far from a done deal and its future rests with the not-so-tender mercies of a Govt strapped for cash. Income splitting has been United Future policy for years but Dunne has never been able to persuade Labour or National to back it, so he’s launched a piece of DIY legislation as Minister of Revenue. The scheme would allow parents with children to combine their income and split it down the middle for tax purposes As Dunne is bringing in his Bill under the support agreement UF signed with National after the 2008 election, the Govt is committed to supporting it on its first reading. But the guarantee ends there. PricewaterhouseCoopers Chairman John Shewan notes the irony in Dunne having been an active supporter (with the Tax Working Group) of lower flatter taxes, which themselves take away much of the argument for income splitting. He also notes history shows Govts should be wary of the dangers of using the tax system as a social tool to deliver assistance to a particular group, in this case working parents with school aged children. These factors, coupled with the complexity of the rules, make the legislation complex and produce some odd results.
The other big difficulty with Dunne’s proposal is fiscal cost, estimated to be $502m a year. Treasury says this would be more than 45% of all new spending in Budget 2011. Treasury also observes the credit is poorly targeted and has negative distributional aspects, as 78% of the benefits are expected to accrue to families earning over $70,000 a year. Dunne is confident of overwhelming support at Select Committee hearings and says the Govt will have to be brave to ditch the Bill at its second reading. Labour won’t give Dunne a chance and says income splitting favours wealthy families. It says “income splitting doesn’t help those who really need it.”
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Duncan Cotterill