Donna Wynd & Susan St John: Bill offers more to already well off

Splitting incomes would have no effect on child poverty. Photo / The Aucklander

Let's hope that parliamentarians can see through Peter Dunne's income splitting bill.

It might seem "common sense" to enable one parent to stay at home to provide the essential caregiving for children, but income-splitting is not the way to go.

Opponents have been quick to point out that the higher the income of the single- income family, the greater the gain from splitting, with the greatest gains going to families on $140,000 or more. That is, the same families that gained the most from the latest round of tax cuts.

In a world of severe constraints and cuts, if there is more money for families, the urgent need is to improve the meager child-related support given to families on benefits. Income-splitting offers little or no help to low-income families, and none at all to sole-parent families and so will have no effect on child poverty.

Yet the Ministry of Social Development's figures show that, even before the recession, one in five New Zealand children were in serious hardship and had unacceptably severe restrictions on their living standards.

Child Poverty Action Group argues the $500 million cost of income-splitting should be used to pay all the poorest families the $60 a week they are denied at present, which would have an immediate impact on child poverty.

Income-splitting is not even good for women who are usually the caregivers.

Under notional income-splitting as proposed, there is no incentive for actual redistribution of household resources so that she has income and assets in her own right. Instead, there is an end-of-year calculation that results in a rebate. Although it is good that this is paid to the caregiver (rather than as a tax offset to the primary earner's tax liability), the rebate cannot be taken as recognising the value of her care-giving.

The higher the primary earner's income, the greater the notional value of the care-giving. Is the care of the partner of someone who earns $100,000 worth six times as much as the care of the partner of someone who earns $50,000?

It is clear there are advantages for women in maintaining some attachment to the workforce when they can. Notional income- splitting provides a clear disincentive for them to work part-time (and thus retain skills) because they are taxed at the joint rate. And it provides an incentive for the man to work more (usually higher paid) hours. This does not promote "work-life balance" or family wellbeing. The stereotypes that did not work well for women in past times are reinforced.

Under progressive taxation on an individual basis, on the other hand, there is an incentive for genuine income-splitting (putting assets in her name as the lower paid taxpayer, encouraging her to work part-time to assist in his business where appropriate).

In essence, the problem has been mis-specified. There is said to be an inequity between the single earner and dual earner households on the same income. But there is a critical difference between them.

Take two couples, with children, each on a total annual income of $100,000. With the first couple, there is a single earner working 40 hours; and with the second, both parents work 40 hours. The second family thus has 40 hours of childcare to pay for while the first obtains those services on a tax-free basis from the stay-at-home parent. They are not in the same situation and should not be taxed the same.

Current arrangements actually provide an effective incentive for the sharing of work and care. In the example above, suppose the second family shares work and care, so each parent works 20 hours and each cares for the children for 20 hours. The incentive to share on this basis while children are young may be healthy for society, and more in tune with the realities of the 21st century.

The income-splitting proposal has not been thought through for those who get Working for Families. Under income- splitting, the highest one earner family in New Zealand with, say, one child, will be entitled to a tax credit of about $170 paid to the stay-at-home parent.

This is more than the Working for Families tax credit of $146 paid to the sole parent or couple with one child on a benefit of $278 a week. It makes an already horrendously complex array of family tax credits even more convoluted.

Who understands the difference between a family tax credit, a parental tax credit, an in work tax credit, a minimum family tax credit and an income-splitting tax credit?

Income-splitting also provides perverse incentives to claim partnership. In contrast to the welfare system where low-income couples are reported to be splitting to maximise their benefit income, this proposal offers an incentive for high-income parents to be classified as in a partnership of some kind.

Given the remarkable diversity and fluidity of families in New Zealand this policy may be almost impossible to administer sensibly.

And it seems that income-splitting is optional. Whose option will this be: his or hers? Child Poverty Action Group urges the Government not to proceed with this costly, inequitable and divisive proposal - which reduces the chances of ever helping the worst off.

* Donna Wynd and Susan St John are Child Poverty Action Group spokeswomen.