In taxation law income splitting is the dividing up of household income by the number of people in a household. On basis of this division, the income tax is then computed for an individual person, and then this amount is multiplied by the (weighted) number of people in a household to determine the entire amount of tax due. In a progressive tax scale, if earnings differ this results in a tax advantage in comparison to individual taxation.
In German tax law, spouse income splitting is applied. The taxable earnings of both partners are added together. Further persons in the household are not taken into consideration. On the basis of half of the total earnings, the income tax is computed and then doubled. With a progressive tax rate, a smaller burden of taxation arises than in the case of an individual tax filing if the earnings of the spouses differ. A particularly large splitting advantage results if only one spouse is a wage earner. The higher the earnings the greater is the relative tax advantage since the tax rate is higher as earnings increase.
Spouse income splitting promotes marriage and is thus in accord with the German constitution that places marriage under the special protection of the state.
A further splitting form is family income splitting as practised in France. Here the taxable earnings are divided by the weighted number of family members, with both partners having a weight of 1 each, the first two children a weight of 0.5 each and all additional children a weight of 1 each. On basis of this value, income tax is determined and, as a final step, multiplied by the weighted number of the family members. For a family with three children, for example, the earnings are divided by four, the tax per person is calculated on the basis of the quartered income, and this amount is multiplied by four to determine to total tax the family must pay.
With a progressive tax rate, the family income splitting leads to a greater tax relief for low-income families with several children than under German taxation law.
Critics point out that income splitting is a subsidy for married couples and families. They criticise that higher income groups in particular reap the benefits, and that children of rich parents receive more tax benefits than those of poor parents. From a legal viewpoint, however, the concept of taxation according to means and the principle of horizontal equity require some form of income splitting. Since means are measured by the average per-capita income of a family, people with the same per-capita income would also have to bear the same tax burden, and for this reason per-capita income must be chosen as the basis for the tax rate. Seen in this way the splitting advantage is no real advantage, but only a justified compensation for the disadvantages that higher earnings have because of the progression in the tax rate.
Because Germany has no family income splitting, families with children are discriminated against vis-à-vis married couples without children with the same per-capita income, since they have a considerably higher tax burden. If, for example, the per-capita income of a family is 20,000 euros, a family without children had to pay 2,701 euros per person in income tax in 2010 (under normal conditions), but a family with three children was taxed 3,529 euros per person. The French system also leads to a stronger per-capita burden of larger in comparison with smaller families, but this difference is by far not as great as in Germany.
Regardless of which system of taxation is more equitable, in any case family splitting leads to an increase in the birth rate. France, due to its family income splitting and other family assistance measures, has one of the highest birth rates per woman in the EU. In contrast, Germany has one of the lowest rates; measured by the number of the newborns relative to the population, Germany is at the bottom of the OECD statistics for developed countries. In an international comparison, Germany spends a relatively large amount in terms of monetary benefits and tax reductions for families – particularly for child benefits and child tax allowances. But this by far does not eliminate the discrimination against families in the German taxation system as the French system has succeeded in doing.
Literature:
German Federal Ministry for Families, Seniors, Women and Youth – BMFSFJ (2006), ( Das Ehegattensplitting ) (2006)
Meier, Volker and Helmut Rainer, „On the Optimality of Joint Taxation for Non-Cooperative Couples", CESifo Working Paper Nr. 3128, 2010 ( Abstract / Download )
Ochel, Wolfgang (zusammen mit Wolfgang Meister) „Tax Privileges for Families in an International Comparison“, CESifo DICE Report 1 (1), 2003, 42–45 ( Download )
Vogel, Klaus „Besteuerung von Eheleuten und Verfassungsrecht“, Steuer und Wirtschaft, 3/1999, 201
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