Family Friendly Tax Policies
8 July 2002
Two of the smaller parties - United Future and the Greens - have some interesting tax policies which should be getting more attention than they are this election campaign. None of their present policies will, if implemented, constitute a fiscal revolution. Rather, they deal with issues of fairness.
United Future wants income splitting for taxation purposes. That means, for a married couple, that half of the combined income would be deemed to be the husband's, and the other half will be deemed to be the wife's.
The Greens want student loans to no longer be repaid as a 10% tax surcharge on annual income in excess of $15,496, and to be written off in annual increments. The Greens also want a universal child tax credit of $15 per first child ($10 for subsequent children), plus the elimination of income tax on the first $5,000 of income.
What is the problem that United Future is addressing? Consider two middle class families with total salary incomes of $100,000. Family A is a traditional single-income nuclear family: mum, dad and two children. Family B is a "double income, no kids" household. Both partners of this family earn $50,000 per annum.
Let us assume that family A has no outstanding student loan, while family B have two student loans outstanding. The annual take-home pay of family A would be $68,630. For family B it would be $69,187. In this context, student loans do not seem too burdensome.
Family A, with children and without student loans, would pay more tax than family B, whose taxes include $7,000 of student loan repayments. Can this inequity be justified? The United Future Party has a valid point. Indeed, if income splitting were adopted, family A would gain of over $7,500, which is close to $150 per week.
Why does family A pay so much tax at present? Part of the reason is that the earner pays some tax at the higher 39 cents in the dollar rate. More important is the way the non-earning parent is treated.
New Zealand income tax scales are simple in comparison with those of most other countries. They were even simpler before the 39 cent rate (effectively a 6 cent surcharge on earnings over $60,000) was introduced in 2000. The first $38,000 was taxed at 19.5 cents in the dollar, and subsequent income was taxed at the company tax rate of 33 cents. It was as if all middle and upper income earners paid 33 percent tax on their entire income, minus an annual tax rebate of $5,130. ($5,130 = 13.5% of $38,000; 13.5% represents the difference between the two tax rates.) This simple formula continues to apply to middle income earners.
Family B, with two-incomes, receives two lots of $5,130 per year. Family A, with just one income, receives just one lot of $5,130 per year. That is the main reason why family B gets to keep more of their earnings, despite their loan repayments.
Income splitting - United Future's policy - effectively gives the non-earner in family A an annual tax credit of $5,130. Certainly nobody would argue that the non-earning caregiver of family A is less deserving of such a tax credit than are the earners of family B.
We have to be careful however, not to jump to the conclusion that United Future's tax policy is much more child friendly than the Greens' tax policies. For example, if the earner does not have an outstanding student loan, the benefits of splitting a $30,000 total income are proportionately less than the benefits of splitting a $100,000 income. Most children are in low income rather than middle income families.
Let's apply the above-mentioned Green policies to families A and B. The restructuring of student loan repayments would put $7,000 more in the pockets of family B, while giving nothing to family A. (However, family B would still have some student loan liability, to be paid in some way outside of the PAYE system.)
The policy to zero-tax the first $5,000 would put $750 more in the pockets of family A, and would give $1,500 more to family B. The reintroduction of the universal family benefit would however give $1,300 more to family A.
The Green's tax policy mostly benefits two income families (with or without children) whereas United Future's policy mostly benefits single-income middle class families.
In my view, the most child-friendly policy would be to combine United Future's income-splitting with the Greens' universal child tax credit. That would mean that all non-earning parents would receive benefits or tax credits comparable with the $5,130 annual tax concession received by middle-income earners.
Child friendly tax credits can be funded out of growth, much as Act and National plan to fund their proposed tax cuts.
I would suggest one change to the Green's child tax credit. I would pay $25 rather than $10 per week for the second child, but nothing extra for third and subsequent children. The biggest increase in the opportunity cost of raising children comes with the arrival of the second child.
A birth rate of at least replacement level this decade would give us more confidence that today's child-bearing generation will be adequately supported in their retirement. Hence we should be encouraging two or three child families.
© 2002 Keith Rankin
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