Income splitting
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Income splitting is the legal concept of fusing a married couple into a single economic entity for purposes of tax filing status. It treatsmarried people preferentially, in the same sense they are treated preferentially in many areas of American state law as well as federal inheritance law.
In the United States, this filing status is called married filing jointly. For a married couple, if both members earn the same income they would have a higher income tax liability under income splitting because under progressive taxation the other spouse's income is added on top and is the extra income and thus all subject to the tax rates at the top. This is what is called the marriage penalty in American tax rhetoric. This is because if both people had been unmarried, both would have had the first dollars of taxable income subject to the lower tax rates on the early dollars of income.
However, if only one of two people earned taxable income and the jurisdiction has a higher threshold for progressively higher tax rates under income splitting, the sole earner married couple has a lower tax liability than the sum of tax liabilities of the two single people, only one of whom had taxable income.
Thus in a jurisdiction with progressive taxation and different tax filing statuses for married and for single filers, income splitting would penalize dual earners and benefit single breadwinning couples. On the other hand, eliminating the marriage penalty would entail ruling out the income splitting idea. These two goals are mutually exclusive and the choice by each taxing jurisdiction must be settled as a political choice.
Income splitting is the default behaviour in countries which allow or require spouses to file a joint tax return. The 13 OECD countries that allow such fillings are the United States, France, Germany, Belgium, Greece, Luxembourg, Portugal, Switzerland, Iceland, Ireland, Norway, Poland, and Spain. 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.
Income splitting became available explicitly in the United States in 1948. 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.
Joint filling by couples is not permitted in other jurisdictions, and tax laws in these countries generally have regulations preventing the direct transfer of 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.
Income splitting is currently a matter of debate in Canada. Joint filings have not been permitted in Canada, but 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 seniors in 2006.
The primary advantage of income splitting is that it reflects that the household rather than the individual is the basic economic unit. A family with one person earning $100,000 per year and another unemployed is no wealthier than a couple where each person earns $50,000, yet the former would otherwsie be taxed at a considerably higher rate due to progressive taxes. The main disadvantage is that it will cost the government several billion dollars per year.
An important social impact of income splitting is that where income is greatly unbalanced between a couple, the woman is almost always unemployed. Canada shifting its income splitting policy would thus amount to a billions of dollars subsidy for this lifestyle, and would have the effect of reducing women's participation in the work force.[citation needed]
This effect is lauded by some socially conservative groups but strongly opposed by feminist advocates. In part because of these concerns, income splitting is becoming less common globally, and, since 1970, it has been abolished in seven of the cotries.
