Working for Families

The Government has said they will look at some changes to working for families, as one way to help free up some money for the earthquake recovery. The possible changes are to remove eligibility for higher income families to it.

At present, familes (in work) receive up to the following income bands:

  • 1 child – $75,317
  • 2 children – $91,227
  • 3 children – $107,137
  • 4 children – $126,947
  • 5 children – $146,757
  • 6 children – $166,567

Now I have long advocated that a family earning $107k a year (let alone $127k a year) should not be receiving welfare. Welfare should be for those who truly need it.

It is also economically very inefficient to tax people, and then give them some of it back as welfare. One should minimise what they call churn.

Also on a personal level, I have no qualms about paying taxes to help a family on say $40,000 with two kids. Bit I do have qualms about paying taxes to be handed over to a family earning $125,000 a year, just because they have decided to have lots of kids.

Now National said they would not alter WFF during this term, and I believe they should honour that. The earthquake recovery will not just be taking place in the next six months. It is good that National will possibly (all they have said is they are not ruling it out) look at changes to WFF, but they should make them an election policy, and implement after the election if re-elected – as they are doing with partial asset sales. It is vital to get a mandate for this. Yes the earthquake is a game changer, and you can use it to justify a pre-election change. And if the election was two years ago, I’d argue you might not be able to wait. but the election is only six months away.

You might even announce changes in the budget to take effect on 1 April 2012, but hold off making any change until after the election, so said mandate is gained.

Now if the intent is to not have WFF, for more wealthy families, how would one do it? There are three ways.

  1. Reduce the base level of WFF for everyone. This means that it will abate out at a lower level. The problem is that all WFF recepients end up with less money, so it is not well targeted.
  2. Reduce the level at which WFF starts to abate. The family tax credit starts to abate at around $37,000 and the in work tax credit at around $59,000 (for a one child family). reducing the abatement level for the family tax credit would catch too many people on relatively modest incomes of $45,000 etc. You could arguable reduce the level at which the IWTC abates, but again this may not be that well targeted.
  3. The third option is to increase the rate of abatement above a certain level. The downside is that it increases the effective marginal tax rate for that family. The abatement rate is currently 20% and if paying a tax rate of 33%, means an EMTR of 53%. If they also have an accom allowance (unlikely)  that abates at 25% then the EMTR is 78%.

What I would consider is increasing the abatement rate from 20% to 25% just for those earning over $70,000 a year. You see National dropped the top tax rate from 39% to 33% (something Labour vows to reverse)for those earning over $70k year so the EMTR would still be slightly lower than it was under the last Government if they are a sole income family.

Now one could say is there any point in reducing the top tax rate by 6% and increasing the WFF abatement rate by 5%. Well yes there is. It is better to have a lower tax rate and not pay a relatively wealthy family welfare, then have higher tax rates and higher welfare payments. Tax churn is inefficent and wasteful.

So what would an extra 5% abatement do for WFF maximum incomes? They would be:

  • 1 child – $75,317 to $74K
  • 2 children – $91,227 to $87K
  • 3 children – $107,137 to $99K
  • 4 children – $126,947 to $115K
  • 5 children – $146,757 to $131K
  • 6 children – $166,567 to $147K

It would be a small modest step in the right direction of saying wealthier families should not recieve welfare. And it would leave Labour in the ludicrous position of having to argue that a family on $120,000 should not receive a tax cut but should receive welfare.

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