I. Overseas Experience

10.5. Over the years, the general issue of the taxpaying unit has been dealt with in overseas countries in a wide and changing variety of ways which to a large extent have been influenced by the history of the legal systems of the particular countries concerned. Several examples may be described.

10.6. In 1799 upon initial introduction into the United Kingdom of an income tax, a husband and wife constituted one taxpaying unit because the English common law, unlike the laws of many parts of Europe, rejected the doctrine of community of property between husband and wife on marriage and regarded the legal personality of the

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wife as merging in that of her husband so that in law they became one person. While in course of time the growth of equitable doctrines modified to some extent the operation of the common law, for a long period this made no practical difference as, in an action to recover the tax levied in respect of the income of a wife living with her husband, he was a necessary party. It was not until towards the end of the nineteenth century that the married women's property legislation began to effect a separation at law between the wife's property and income and her husband's rights thereto. This separation was not finally completed until 1935 but, in the removal of these restrictions upon a married woman's property rights, the income tax legislation did not march in company with the laws of property. It was not until 1950 that the married woman ceased to be classified for the purposes of the income tax legislation as an ‘incapacitated person’ along with infants and various categories of mental defectives. Although from time to time full aggregation of the wife's income with her husband was in some respects departed from, the Income and Corporation Taxes Act 1970 still deems the income of a married woman living with her husband to be his income and not hers. In 1914 the husband was given the right to require separate assessment of their respective incomes and in 1918 provision was made for either husband or wife to make a similar election but, in general, separate assessment did not make the parties liable to pay less tax.

10.7. Originally the separate incomes of husband and wife were added together and this income was taxed as if it were the sole income of one taxpayer. Ultimately concessional deductions were allowed as some means of recognising differences in taxable capacity of different taxpaying units—in addition to deductions for dependent children. The United Kingdom allows personal deductions which vary according to marital status. If the wife works, a special wife's earned income allowance is also provided in the form of a deduction from taxable income additional to the personal deduction. Since 1971, married couples have been provided, where husband and wife jointly elect, with a limited option of submitting separate income tax returns. Under this option, tax is calculated as if all the income other than the wife's earned income were the husband's, so that for tax purposes the husband receives only the single person's personal deduction, and the wife is taxed as a single person on her earned income, with the single person's personal deduction only. The wife's earned income relief is not available under this option and the allowances for children must be claimed against the husband's income. The new option is described in the following terms in a reference document submitted to the OECD by the United Kingdom Government:

‘Whether this [the new option] will reduce the total tax bill of a married couple will depend upon their personal circumstances; but as a general rule it will not unless their combined income exceeds £6,900, and may not do so even then’.

10.8. In the United States there is another system that can be traced to a legal background of property and income rights. After an earlier abortive attempt to levy an income tax, Congress was given constitutional power in 1913 to impose an Income Tax Act. However, the law with regard to the property and incomes of spouses was not, and still is not, uniform throughout the United States. In eight States, which prior to their accession to the Union had been under the influence of the European community property legal system, property acquired by a husband and wife after marriage is presently regarded as owned by them in community and in equal shares and the income from such property is divisible equally between them. Each of these States has different rules to distinguish between separate income and community income but generally all earned income is community income. All property acquired by either

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spouse before marriage is his or her separate property and property acquired thereafter is their community property. Income tax returns in these eight States may be filed jointly or separately. In the separate return, half the community income is shown and, in addition, the separate income. Usually the filing of a joint return will result in a tax saving to both spouses. In the remaining States, where there is no community property law, the spouses may file a joint return and this even though one spouse has no income or deductions. Generally the filing of a joint return will result in the saving of tax for the married couple because of the tax rates applicable to the joint return or optional tax tables, the latter being available where the joint return shows an adjusted gross income from all sources of less than $10,000. The presence in the Union of a number of community property States has no doubt influenced the course of taxation in the remaining States in an attempt to achieve some uniformity in the mode of taxing spouses.

10.9. The split-income provisions, when initially enacted in 1948, gave the couple the option of filing a joint return under a tax rate schedule that provided tax brackets twice as wide as those applying to single people. This in effect resulted in the same taxation burden as if each spouse was taxed separately on half their combined income. Compared with the Australian system, it had much the same effect as legally allowing all married couples to put themselves in the position of those practising what here might be regarded as income-splitting abuses. This rather peculiar, though temporary, arrangement was an outcome of the previous history. However, as the result of criticism of this system by single persons, the rate schedules were changed in 1969 to ensure that in no event did the liability of a single person exceed by more than 20 per cent that of a married couple with the same taxable income. A new head-of-household classification was also introduced to meet the cases of unmarried persons with family responsibilities, providing for rates that fall midway between those of single and married persons. It is now possible for two single persons with equal incomes who are living together to pay less tax than a married couple with the same total income, a situation that was not possible under the pre-1969 legislation which incorporated an underlying tax bias in favour of marriage.

10.10. South Africa is a country which, through the influence of its connection with Roman-Dutch law, has a community property legal system. For taxation purposes the income of a woman, married and with or without community property, living with her husband, is deemed to be income accrued to her husband and in such case the husband makes the return and is liable for the tax. If, in the income return of the husband, there is any income earned by the wife not in association with her husband, for example not in a husband-wife partnership or in a private company in which both are interested, the husband is allowed a deduction of R.500 or the actual amount of earned income if it be less than that figure. Either husband or wife may make application to the Secretary for Inland Revenue for the right to submit a separate return and a separate return may be lodged if he considers it to be desirable. The Secretary himself may also require the making of a separate return. However, the total tax payable on the separate assessments must not be less than the total tax payable by the husband alone had the wife's income been assessed as his. In South Africa a married man's liability to tax is on a much more favourable basis than that of other persons. He enjoys lower rates of taxation. He is also entitled to a much higher primary abatement (deduction) in addition to the earned income deduction and to more advantageous medical deductions.

10.11. While the rule of aggregating the incomes of husband and wife is found in other European countries, the unit of taxation is sometimes the family. Thus, in

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France not only are the incomes of husband and wife aggregated but also the incomes of children are included in the income of the family unit. Allowance for differences in the composition of families and differences in family size are then made, not by way of deduction but instead by means of a method commonly called the ‘quotient system’. The aggregate income is divided into parts according to the number of adult persons and children in the family and tax is charged separately on each part. For this purpose a child is counted as one-half and an adult as one part. Thus a married couple with two dependent children pays three times the tax of a single person with one-third of the joint family income. This system may provide a more generous treatment of married couples, especially those in higher tax brackets with children, than either the United Kingdom or the Australian system.

10.12. The present United States system is similar in many respects to the Carter Commission proposal for reform in Canada which after lengthy discussion was not accepted by the Canadian Government. This plan provided separate rate schedules for single persons and married couples but also included the incomes of dependent children in family income subject to tax. Dependant allowances were to be granted in recognition of differences in family circumstances; however, unlike the quotient system described above, the variation in tax liability between single persons and families was to be achieved by means of the different rate schedule. But Canada preferred to tax husbands and wives as individual persons.

10.13. Mention should also be made of a recent change in Sweden which reverted from a system that taxed the combined income of husbands and wives (and of single persons living together) to one that now taxes the earned income of wives separately. Property income is still taxed in the hands of the husband as before. A stated purpose of the change was to remove the disincentives for married women to work inherent in the previous system.