Income splitting

Income splitting is a tax policy of fictionally 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).

Global Incidence

Of developed countries, only the United States, France and Portugal require 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 method of assessing payroll tax in the United States, which assesses extra taxes and reduced benefits to families that spread their income over two earners, and provides funded and unfunded subsidies to patriarchal families. 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the declining birth rate in Germany to these and other policies of subsidizing patriarchal marriage, some of which were originally enacted by Adolf Hitler.

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.

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.

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, and to push women back into unpaid or lower paid work after their substantial economic contributions during World War II, led to the override of Truman's double veto.

Income splitting 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

Income splitting has never existed in Canada. Originally Canadian households were almost exclusively deemed to be single income households. In 1962 a Royal Commission on Taxation was initiated under Kenneth Carter by PM John Diefenbaker to examine and to recommend improvements to the federal tax system. The report declared "... that fairness should be the foremost objective of the taxation system; the existing system was not only too complicated and inefficient, but under it the poor paid more than their fair share while the wealthy avoided taxes through various loopholes."

From the Carter commission's report:

We conclude that the present system is lacking in essential fairness between families in similar circumstances and that attempts to prevent abuses of the system have produced serious anomalies and rigidities. Most of these results are inherent in the concept that each individual is a separate taxable entity. Taxation of the individual in almost total disregard for his inevitably close financial and economic ties with the other members of the basic social unit of which he is ordinarily a member, the family, is in our view another striking instance of the lack of a comprehensive and rational pattern in the present tax system. In keeping with our general theme that the scope of our tax concepts should be broadened and made more consistent in order to achieve equity, we recommend that the family be treated as a tax unit and taxed on a rate schedule applicable to family units. Individuals who are not members of a family unit would continue to be treated as separate tax units and would be taxed on a schedule applicable to individuals.

Subsequently the 1970 Royal Commission on the Status of Women recommended a system of elective joint taxation to address the issues of both tax fairness between families and concerns regarding disincentives for women's participation in the work force.

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). Households of similar gross incomes are bearing broadly different tax obligations. On an individual basis this is not the case. Households with the same total income are eligible for identical tax-delivered benefit payments but may have significantly different tax liabilities. Further, while bearing the same general costs of everday life such as child care one family can experience far greater tax relief while having the same gross income, due to the requirement child care expenses be applied to the lower spouse's income.

After enacting income splitting for retired couples in 2006, in 2011 the Conservative Party of Canada led by Stephen Harper won a majority government with a platform promising limited income splitting.

The proposed policy would allow families, with children under 18, to split their household income of up to $50,000, once the federal budget was balanced. The Tories estimate that almost 1.8 million families would be able to capitalize on the tax package and they would save an average of $1,300 annually.

A 2013 study by the C. D. Howe Institute concluded that incoming splitting "does more harm than good", and a 2014 study by the Canadian Centre for Policy Alternatives claims that would primarily benefit wealthier families. However, the CD Howe study went far beyond the scope of the limited proposal in the Conservative campaign platform by including the consequences of the provinces following suit. It also speculates upon the effects of workforce participation of the lower earning spouse which is easily addressed by elective joint taxation such as recommended by the 1970 Royal Commission on the Status of Women.

In February 2014, a day after introducing the 2014 budget, Minister Flaherty distanced himself from the concept of income splitting, though others within the Cabinet still support the idea.

See also

• Marriage penalty
• Shared Earning/Shared Parenting Marriage