The Australia government should reform the tax code to allow for a limited form of income splitting between spouses, with a maximum tax benefit of $2,000.
Funding for this proposal can be found by abolishing the Family Tax Benefit Part B, which is far more costly and ill-targeted.
What is income splitting?
Income splitting is a tax policy that allows individuals to attribute part of their taxable income to their spouse, spreading the tax burden over two individuals in order to take advantage of lower marginal rates. It provides a real financial benefit to families — particularly families with a single income earner — through a lower tax bill.
Income splitting with a $2,000 benefit
The Australia tax code currently disadvantages single income families. This is because of the high tax-free threshold of $18,200. Families with a single household income are required to pay tax on earnings above $18,200, however duel income households are not require to pay tax until reaching an income above $36,400, double of that of the single income household.
This reduces the disposable incomes of single income families — for both two parent and single parent households. It also pushes up the price of early childhood education, as stay at home parents are pressured to enter the workforce, despite the added cost of finding a suitable childcare centre.
To help alleviate this pressure, the Australian Taxpayers’ Alliance proposes a limited system of income splitting so that families can take full advantage of two tax-free thresholds of $18,200. A single income family will be able to transfer the full $18,200 from the income earner to their spouse — or in the case of single parent families, to one of the children. In duel income families with one of the income earners earning less than the tax free threshold will be able to transfer the amount equal to $18,200 minus the earnings of the secondary income earner. For example, a family with a primary earner earning $65,000 and a secondary earner on $15,000 could transfer $3,200 from the primary to the secondary income earner.
This limited system of income splitting would provide a benefit of up to $2,000 for Australian households. It would deliver tax relief to upwards of 800,000 families, allowing them to better choose the work-life balance that suits their family.
Cost of the proposal
The Parliamentary Budget Office estimates this proposal for limited income splitting would cost $1.5 billion per year. However this is far less than the $7 billion a year we already spend on childcare facilities, services, and fee assistance rebates. This is relevant because limited income splitting would reduce demand for early childhood education.
Savings from Family Tax Benefit Part B
The Family Tax Benefit Part B is a wasteful and unnecessary middle class welfare policy. It allows those earning over $150,000 per year to receive payments of $4,409.20. To put this into perspective, the gross income of the median Australian household in 2011 was $64,168. This means Family Tax Benefit Part B Forces a proportion of low income taxpayers to fund those with above average incomes.