High marginal tax rates the real challenge

Whether income-splitting is introduced or not, something has to be done to tackle high marginal tax rates, according to KPMG tax partner Paul Dunne.

KPMG has released issue two of its publication taxmail, which this time looked at the issues paper on income splitting for couples with children that was released last week.

It followed the income splitting discussion document issued by the previous government last year and was part of the confidence and supply agreement between National and United Future.

Under the proposed income splitting tax credit a couple’s combined income would be split on a 50/50 basis and personal tax rates would be applied to each income.

This would mean that, for example, a family with one parent earning $80,000 a year and the other earning $20,000 a year would pay a lot less tax because of the difference in marginal tax rates.

According to taxmail, “The government will need to consider the impact income splitting may have on overall equity in the tax system and what the appropriate definition of “fairness” needs to be.

“It is important, for the overall coherence of the tax system, that any changes are consistent.

“In particular, how does income splitting fit with the government’s broader alignment objectives and how will this additional support (expected to cost around $450 million per annum) be funded?”

Mr Dunne told NBR that there are two ways of looking at the issue of “fairness” in the tax system.

“Should people with the same income be treated in the same way, or should the tax treatment take account of their overall circumstances?”

The income-splitting proposal comes at a time when the Tax Working Group, which Mr Dunne is a part of, is set to report to the government on a range of options for tax reform.

And while he wouldn’t comment on the likelihood of the income-splitting proposal being implemented, he said it was a function of New Zealand’s progressive income tax system.

“Something needs to happen around marginal tax rates- whether this is implemented or not is a moot point.”