Income Splitting

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Some countries allow income splitting when a couple files their tax returns. The idea is that the higher wage earner basically transfers some of his/her income to the lowest wage earner and hopefully drops into a lower tax bracket. This ultimately means the higher wage earner pays less taxes.

The downside is that such a practise is unfair to single wage earners and may discourage some people from entering the workforce (so their partner can pay less taxes).

How do you feel about income splitting?

15 thoughts on “Income Splitting

  1. I don’t know, but I would think in general that the more a country taxes work, the less likely it is both spouses would work.

    Could income taxes go to zero in a polyg household?

  2. I fail to see how income splitting isn’t fair to the single income earning person. While they may not be able to lower their tax burden, they also do not need to support another mouth to feed, buy clothes for a spouse, etc…

    In fact, I would like to see income split across all dependents in the income earning household. Why penalize those with large families by demanding more taxes from the primary income provider when they have more expenses than the single person?

  3. That’s an interesting idea about splitting income across dependants, but then wouldn’t taxes need to be increased across the board to make up for lost revenues? And, in turn wouldn’t this put a higher burden on single income earning people? And therefore wouldn’t you consider this unfair for those that aren’t supporting families? Why should they have to pay more taxes just because they are either unable or unwilling to find a partner and/or a family and yet have to pay more for those that do?

  4. In the US two people earning $75K/each pay more in taxes than a couple where one spouse earns $150K and the spouse does not work for pay. Payroll taxes max out at $97.5K; any income above that is not subject to payroll taxes. The dual income earners don’t ever reach that cutoff point. Of course, at that income level it might not be that big of a deal.

    It sounds like a way to work around the marriage penalty, but that penalty really only exists for dual-income workers. The benefit you describe is only a benefit in single-income families. Sounds like social engineering to me.

  5. True income splitting (at least as preacticed in several U.S. states) taxes each spouse on their actual earnings and splits unearned income (e.g. interest, dividends, capital gains, and rent) evenly between them. People cannot just arbitrarily assign earned income to the spouse who did not earn it. They can, however, assign dependents to the spouse who most needs the deduction.

    I would prefer to see a system in which earned income is taxed at the individual level, but unearned income is taxed at the family level. After figuring your tax on your earned income, all of the earned and unearned income in the family would be added up to determine the tax bracket. Then the corresponding marginal rate would be apllied to the unearned income only. Like most good tax ideas, though, it would make things more complicated.

  6. Jeff,

    Maybe governments should better control their outrageous spending so there wouldn’t need to be an overly heavy tax burden on the population.

    Or perhaps move to a flat tax. I say 10%.

  7. The US Federal Government (not States or local goverment) could abolish Federal Taxes except for the political failout from companies and people (CPA’s bookkeepers, tax preparers, etc) who make their living because of the tax laws.

    There really is no need for the US Government to collect taxes from its citizens except to give the impression that taxes pay for the Government.

    The US Government controls the supply of dollars through out the world and shrinks or expands the amount available for commerence in order to control inflation. The government could simply add or remove the amount they need to the currency available without taking it from families.

    The downside of course is that people would need to understand there really is nothing backing the value of a dollar (like gold or silver) and the amount the government spends does not add to inflation. Inflation or deflation depends upon the amount of currency available which the Federal Reserve controls.

    Concepts like income splitting are political tidbits used to reward or punish certain income groups.

    The US dollar is a fiat currency with nothing backing it.

    Income splitting is an interesting ideal depending upon how it effects you. It lowers the tax for some and raises it for others.

  8. Sorry for engaging a threadjack, but this nonsense cannot be left unchallenged.

    the amount the government spends does not add to inflation. Inflation or deflation depends upon the amount of currency available which the Federal Reserve controls.

    But what you are proposing (i.e., allowing the government to add or remove the amount they need to the currency available) would take the money supply out of the hands of the Federal Reserve and give it to the Treasury Department. Every dollar the government spends would increase the money supply and devalue the currency. The resulting inflation would be just as unpleasant as any tax.

  9. “Maybe governments should better control their outrageous spending so there wouldn’t need to be an overly heavy tax burden on the population.”

    I’m actually not really that frustrated by the way my* government spends money. I also like the graduated tax system, because (and this is probably based on nothing more than my gut feeling) it helps to keep the divide between rich and poor from getting too wide.

    *I live in Alberta, Canada.

  10. Last Lemming – The amount the US Government spends adds to the rate of inflation regardless of taxes. The Federal Reserve creates money out of thin air. The US Government then “borrows” the money to pay for the amount they spend. An increase in the money supply adds to inflation. The trick is to control the amount that is needed without creating too much.

    Jeff Milner said: “I also like the graduated tax system, because (and this is probably based on nothing more than my gut feeling) it helps to keep the divide between rich and poor from getting too wide.”

    Taxes for the most part do not part the rich from their money. The rich need need high tax rates so tax shelters work for them which leaves the working middle class to pay the bulk of taxes.

    Income splitting is also an unfair tax place upon those who are not married while it is a fair tax for married couples by lowering their taxes leaving singles to pay a larger portion of the taxes.

    It is to a government’s benefit for the majority of its citizens to be married vs single. Income splitting is a form of social engineering via the pocketbook.

    The only fair tax is a tithing type of tax where everone pays the same % with no tax shelters of any kind.

  11. “Taxes for the most part do not part the rich from their money.”

    I think that statement is MORE true for the United States than Canada.

    “The rich need need high tax rates so tax shelters work for them”

    But if they didn’t have high taxes would they need shelters? To me it sounds a bit like the “which came first, the chicken or the egg?” scenario. Having said that, if the rich didn’t have high taxes, would they need tax shelters?

  12. The Federal Reserve creates money out of thin air. The US Government then “borrows” the money to pay for the amount they spend.

    Where do you get this stuff? The US government borrows money from holders of T-bills and notes. The biggest purchasers are the Social Security Trust Fund and the Chinese equivalent of the Federal Reserve, not the US Federal Reserve. That creates its own problems, but not the one you are imagining.

    Taxes for the most part do not part the rich from their money. The rich need need high tax rates so tax shelters work for them which leaves the working middle class to pay the bulk of taxes.

    Taxes actually do a pretty good job of separating the rich from their money. In the U.S., the richest 10% pay half of all federal taxes. See the following link for a source:
    http://www.cbo.gov/ftpdocs/77xx/doc7718/EffectiveTaxRates.pdf

  13. How do you think the money supply grows and shrinks? Money is put into circulation via loans. Loans to the government or payback of loans increases or decreases the amount of money in circulation.

    If the Federal Government borrows 100 billion dollars, then 100 billion dollars is now in circulation. If they pay back 100 billion, then 100 billion is taken out of circulation. Interest rates are also used to control the amount of money in circulation. HIgh interest rates are used to slow the amount and low rates are used to increase it.

    Federsl taxes could be abolished and Federal Spending along with interest rates could manage the amount of money in circulation. The trick would be to continue the belief the government knows what it is doing. Taxes mask how money works.

    If I gave you 100 dollars and asked you to give me something back that has a value of 100 dollars, what would you offer?

    It is estimated that a flat tax would need 17% of everyones gross to generate enough money. How does the church do it with only 10%?

    On the income split – If I make 100,000 and my wife makes 20,000 – what amount would we be taxed on?

  14. “It is estimated that a flat tax would need 17% of everyones gross to generate enough money. How does the church do it with only 10%?”

    I have almost completely lost you. Where is this estimate of 17% coming from and what is it generating enough money for? And why would you even try to compare a government tax system with what the church asks for in donations? But in all fairness I’ll answer your question by saying the reason the church only asks for 10% as opposed to what the government asks for is that the church and any government are completely different organizations with completely different budget needs.

    So for sounding so snarky, but I just wonder if you’re serious about these questions or if you just trying to get people going?

  15. I think it fair, My husband goes to work for 8 hour a day,for maybe on average of 6 days a week. I’m at home with our two young children 24 hours, 7 days a week and no break… But it not considered a income…

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