Now, we’ve discussed this before, over two years ago. Our primary point was:
If we then view individuals as the appropriate economic unit, income splitting seems un-equitable. By allowing income splitting we are giving a tax advantage to those in a relationship versus those that are not … something we should only be willing to entertain if there is a positive externality associated with that household structure.
I didn’t realise it was governments role to promote a certain family unit – sounds a little like social engineering to me. But I digress.
Eric Crampton brings up important points regarding marginal tax rates – something I was aiming to mention, but now don’t really have to. His main point is that this policy will, in places, increase the MTR’s on second income earners (who are very responsive to taxes in terms of labour supply) and slightly reduces it for main income earners (who are relatively unresponsive in terms of their labour supply).
I would add that, to keep tax income sufficient for the level of spending (so assuming tax neutrality) we would need higher marginal tax rates on some section of households who aren’t this ‘standard unit’ Peter Dunne is targeting. So their incentive to supply labour will be lower – and their tax burden will in fact be higher.
SO, the only way to support the policy, really, is if you believe that there is some external benefit from having households form in a certain way – that is an argument I wouldn’t be willing to make, so I genuinely dislike the policy.
Update: Frogblog also dislikes this policy. Fundamentally, I believe that we agree that treating the household as the economic unit rather than the individual is not going to be conducive to optimal tax policy. I would also like to point out that there are people who support the policy in the comments – and they are good comments from the other side, so if you like read them (and my corresponding replies). My key point is that, yes there are situations where we would want to do certain things – but this seems like a ninth best solution, rather than any type of sensible, reasoned, and targeted policy.
Update 2: The Standard also attacks the policy. But I would note that if you don’t think the current tax system is equitable, these numbers would just reinforce the point that some earners are currently paying “too much” tax rather than saying a change would be unfair. This is why we need to discuss the allocation issues from first principles, rather than relying on the change from status quo per see.
Update 3: No Right Turn is also against on the grounds of discrimination on the basis of family status.