Income splitting
Encyclopedia
Income splitting is the legal concept of fusing a married couple into a single economic entity for purposes of tax filing status. It would treat married 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 they both 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 had these two people 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 were earning taxable income and if the jurisdiction has a higher threshold for progressively higher tax rates under income splitting, then 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
government of Stephen Harper
has mused about bringing them in. In part to mitigate the effects of the government's decision to tax income trust
s, 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, in the vast majority of cases where income is greatly unbalanced between a couple, the woman is 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. 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 OECD countries.
In the United States, this filing status is called married filing jointly. For a married couple, if they both 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
Marriage penalty
The marriage penalty in the United States refers to the higher taxes required from some married couples, where spouses are making approximately the same taxable income, filing one tax return than for the same two people filing two separate tax returns if they were unmarried...
in American
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
tax rhetoric. This is because had these two people 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 were earning taxable income and if the jurisdiction has a higher threshold for progressively higher tax rates under income splitting, then 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
Marriage penalty
The marriage penalty in the United States refers to the higher taxes required from some married couples, where spouses are making approximately the same taxable income, filing one tax return than for the same two people filing two separate tax returns if they were unmarried...
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
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
, Belgium
Belgium
Belgium , officially the Kingdom of Belgium, is a federal state in Western Europe. It is a founding member of the European Union and hosts the EU's headquarters, and those of several other major international organisations such as NATO.Belgium is also a member of, or affiliated to, many...
, Greece
Greece
Greece , officially the Hellenic Republic , and historically Hellas or the Republic of Greece in English, is a country in southeastern Europe....
, Luxembourg
Luxembourg
Luxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...
, Portugal
Portugal
Portugal , officially the Portuguese Republic is a country situated in southwestern Europe on the Iberian Peninsula. Portugal is the westernmost country of Europe, and is bordered by the Atlantic Ocean to the West and South and by Spain to the North and East. The Atlantic archipelagos of the...
, Switzerland
Switzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
, Iceland
Iceland
Iceland , described as the Republic of Iceland, is a Nordic and European island country in the North Atlantic Ocean, on the Mid-Atlantic Ridge. Iceland also refers to the main island of the country, which contains almost all the population and almost all the land area. The country has a population...
, Ireland
Ireland
Ireland is an island to the northwest of continental Europe. It is the third-largest island in Europe and the twentieth-largest island on Earth...
, Norway
Norway
Norway , officially the Kingdom of Norway, is a Nordic unitary constitutional monarchy whose territory comprises the western portion of the Scandinavian Peninsula, Jan Mayen, and the Arctic archipelago of Svalbard and Bouvet Island. Norway has a total area of and a population of about 4.9 million...
, Poland
Poland
Poland , officially the Republic of Poland , is a country in Central Europe bordered by Germany to the west; the Czech Republic and Slovakia to the south; Ukraine, Belarus and Lithuania to the east; and the Baltic Sea and Kaliningrad Oblast, a Russian exclave, to the north...
, and Spain
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
. Also, in the Netherlands
Netherlands
The Netherlands is a constituent country of the Kingdom of the Netherlands, located mainly in North-West Europe and with several islands in the Caribbean. Mainland Netherlands borders the North Sea to the north and west, Belgium to the south, and Germany to the east, and shares maritime borders...
, 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
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
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
Conservative Party of Canada
The Conservative Party of Canada , is a political party in Canada which was formed by the merger of the Canadian Alliance and the Progressive Conservative Party of Canada in 2003. It is positioned on the right of the Canadian political spectrum...
government of Stephen Harper
Stephen Harper
Stephen Joseph Harper is the 22nd and current Prime Minister of Canada and leader of the Conservative Party. Harper became prime minister when his party formed a minority government after the 2006 federal election...
has mused about bringing them in. In part to mitigate the effects of the government's decision to tax income trust
Income trust
An income trust is an investment that may hold equities, debt instruments, royalty interests or real properties. The trust can receive interest, royalty or lease payments from an operating entity carrying on a business, as well as dividends and a return of capital.The main attraction of income...
s, finance minister Jim Flaherty
Jim Flaherty
James Michael "Jim" Flaherty, PC, MP is Canada's Minister of Finance and he has also served as Ontario's Minister of Finance. From 1995 until 2005, he was the Member of Provincial Parliament for Whitby—Ajax, and a member of the Progressive Conservative Party caucus...
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, in the vast majority of cases where income is greatly unbalanced between a couple, the woman is 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. 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 OECD countries.