Income splitting

Income splitting is the legal fiction of attributing earned income of one spouse to the other spouse for the purposes of assessing personal income tax (i.e. "splitting" away the income of the greater earner, reducing his/her income for tax measurement purposes), thus reducing tax rates paid by the spouse who earns more and increasing rates paid by a spouse who earns less (or nothing), a type of regressive taxation. It fuses a married couple's earned income into a single economic entity for purposes of tax filing status, which has distorting economic and child development effects that can be far-reaching in implications.

In a jurisdiction with progressive taxation and different tax filing statuses for married and for single filers, income splitting penalizes dual earner couples and requires them to subsidize single breadwinner (or primary breadwinner) families. The tax system thus encourages sole breadwinner marriage and discourages two-earner marriage and Shared Earning/Shared Parenting Marriage.

Income splitting does this through a "marriage bonus" for the greater earner in a couple and a "marriage penalty" for a lesser earner (or nonearner) in a couple, because the greater earner gets to reduce his/her income so that s/he gets a lower rate, while the lesser earner (or nonearner) has greater income and gets a higher rate. This can have a cumulative effect over time of increasing tax pressure in a married couple to put all earnings on one spouse and all unpaid work on the other.

The primary fiction of income splitting is that, while it characterizes the income as "household", it hides that only one earner (intended to be the man) has earned income and controls the resources of the family, placing all responsibility for unpaid work on the other partner (intended to be the woman as noted in the discussion below). With income splitting, a family with one person earning $100,000 per year and another unemployed is subsidized, through the tax system, by a couple where each person earns $50,000 or even a couple where one earns $75,000 and one earns $25,000. It also creates economic distortion in that women's work becomes unrecognized and disincentived and paternal neglect of children causes problems in child development that are very costly and sometimes impossible to remedy.

The fiction of joint earned income thus creates a regressive taxation effect that can counteract the intended effect of a progressive tax rate scheme. While the overall income tax system rates are progressive, they are regressive in comparing the two spouses' earned income with each other, which regressivity paradoxically becomes more and more regressive the more progressive the rate structure in the general income tax system. Removing the fiction of joint earned income removes the paradoxical effect and makes a progressive taxation model coherent and integrated without this latent counter-progressive (or regressive) effect.

Global Incidence

Of developed countries, only the United States, France and Portugal require the fiction of earned income splitting in marital tax measurement. The International Monetary Fund has called for the United States, France and Portugal to abandon the practice along with other tax practices, such as the payroll tax in the United States, which assesses extra taxes and reduced benefits to families that spread their income over two earners, and provide funded and unfunded subsidies to patriarchal families.^[1] In part because of these concerns, as well as interest in policies supporting both parents having personal responsibility for children in order to support their development without distortion, income splitting is becoming rare globally, and, since 1970, it has been abolished in many countries.

Only a few OECD countries even allow such fillings, including Norway and Germany, although in Germany there is increasing acknowledgment of the connection between the declining birth rate in Germany to these and other policies of subsidizing patriarchal marriage, some of which were originally enacted by Adolf Hitler.^[2]

Also, in the Netherlands, there is a fiscal instrument of the joint tax declaration that allows for an optimal income tax distribution including tax rebate shifts.

Other countries require joint returns but measure the tax on earned income individually, while others use only individual returns. Tax laws in these countries generally have regulations preventing the direct transfer of earned income from one spouse to another to reduce taxes. There are often still methods of using income splitting to reduce taxes in these jurisdictions. For those who own their own company, hiring family members will reduce the overall tax burden by shifting income to a low taxed wage from the higher taxed profits. Having all investments in the name of the lower taxed family member will also allow the tax burden to be reduced.

United States

In the United States, this filing status is required of married couples.

"Marriage bonuses" to sole or primary breadwinner married couples have been cited by the Tax Policy Center as one of the debt-ballooning policies of the Bush tax cuts. These "marriage bonuses" are often either subsidized by single people and two-earner marriages or are unfunded and thus contribute to government borrowing.^[3]

While its effects on the national debt have increased substantially in recent years, income splitting became required explicitly in the United States originally in 1948. After two successive vetoes by President Truman, a GoP-led effort in Congress obtained enough votes to institute the fictionalizing of marital income. Until then, only single filing was permitted. However, couples in community property states such as California had access to de facto income splitting since one-half of the income of one spouse could be attributed to the other spouse. This led to equity issues among taxpayers in community property and those in common law states and hastened the passage of de jure income splitting. While other solutions to this distortion in community property states were available, political activism to establish a male entitlement (or first right) to paid work, seen as necessary by those threatened by women's substantial contributions to the United States effort in World War II, and who sought to push women back into unpaid or lower paid work, led to the override of Truman's double veto.^[4]

This effect is lauded by some advocates of Patriarchal families (whether married or not). Reinforcement of this distorting fiction was a significant element of the Contract with America led by Newt Gingrich, which led to the 1996 tax reform in the United States not repealing the fiction.

The fiction is strongly opposed by United States economists such as Justin Wolfers and Betsey Stevenson and by those in two-earner marriages and especially those in Shared Earning/Shared Parenting Marriages. The opposition also comes from those who see this type of taxation contributing to problems of Child neglect, particularly by fathers, family breakdown, equal pay for equal work problems for women, poverty in general, and the Feminization of poverty, particularly in older women.

Canada

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Income splitting is currently a matter of debate in Canada. Advocates have been seeking to restore it, but have been largely unsuccessful. Combined family income is not used to calculate a family's tax liability, however, it is used to determine a family's eligibility for tax-delivered benefit payments, such as the Canada Child Tax Benefit (CCTB). Advocates use this to argue that their "households" are paying higher tax rates on their earned income; on an individual basis this is not the case, however.^{[citation needed]} "Households" with the same total income are eligible for identical tax-delivered benefit payments, but may have significantly different income tax liabilities. The Conservative Party of Canada under Stephen Harper has mused about bringing them in. In part to mitigate the effects of the government's decision to tax income trusts, finance minister Jim Flaherty introduced income splitting for pension income in 2006. A 2014 study by the Canadian Centre for Policy Alternatives claims that would primarily benefit wealthier families.^[5]

See also

• Marriage penalty
• Shared Earning/Shared Parenting Marriage

References