Time for a Tax Revamp | The Jackal

13 Sep 2011

Time for a Tax Revamp

Gareth Morgan and Susan Guthrie answered the critics of their ideas to transform NZ's tax and welfare system in a great read on the New Zealand Herald's website today. Don't get me wrong, I'm no fan but I believe in giving credit where credit is due.

They answer the three main criticism to their proposals, and the main one to stand out for me was their answer for CRITICISM 2: Many people will choose not to work at all if they get the UBI.

Because of benefit abatement rates, the current system makes it perfectly rational for people who rely on benefits not to supplement them with paid work. You wouldn't attempt paid work if it left you worse off - why should you? With respect to unpaid work, New Zealand has one of the highest rates of unpaid work in the world - hardly indicative of a nation of shirkers.

and

It is also important that there are paid jobs for people to do. We address this issue with the tax proposal. By leaving large gaps in the tax base, current policies have encouraged huge amounts of money to be invested in housing - but what paid work does this create? - the initial build, then cleaning, gardening, someone to fix the odd faulty tap. This excessive focus on housing has been at the expense of investment in real wealth creation.

Gareth and Susan nailed it with good old fashioned straight forward thinking. So to highlight what they're talking about a bit more, here's some info re National's "incentives" so far:

Unemployment beneficiary

Scott is 25 and receives the Unemployment Benefit. He lives in a shared flat, pays $100 a week rent and receives $36 in Accommodation Supplement. Under Budget 2010 changes, he gets a $3.92 a week increase in his benefit and pays an extra $2.89 in GST. Overall, he is $1.03 a week, or $53.56 a year, better off.

Scott weekly income Before After
Net Benefit
$194.12
$198.04
Accommodation Supplement
$36.00
$36.00
Disposable income
$230.12
$234.04
Change in disposable income
due to indexation
$3.92
Extra GST
$2.89
Change in net income
+$1.03
Annual change in net income
+$53.56

Doesn't seem like much incentive to stay on the dole. But is there an incentive for Scott to start working? According to this Ministry of Social Development web page, the abatement rate is 70 cents in every dollar earned over $80 a week, for people on Unemployment Benefit. They also pay tax on that and the Accommodation Supplement is automatically deducted.

So let's say Scott is working part time and earning $104.00 for 8 hours per week at minimum wage. Scott's tax on secondary income is 12.54% meaning an additional $678.16 is deducted per year. He looses his Accommodation Supplement straight away - $1944 per year. That works out to be a reduction in his income of $50.43 per week. Then an additional reduction of $16.8 on the $24 he earns above the threshold gives Scott $36.77 in the hand per week. He is effectively working for $4.60 per hour.

Not much incentive then to start working eh! And without a CGT, there's not going to be much incentive for people to invest in job creation either.