EMTR Summary Impacts
This post is by PaulL, a regular commentor and occasional contributor. It is the seventh post in a series on the financial incentives to work and the impacts of our tax and transfer system on household formation. The index to all posts in the series can be found here.
This post summarises the analysis to date over the series that have sought to highlight the current reality facing people in receipt of income support in NZ. This draws to a close the first story arc, reviewing what concerns I see with the current arrangements, and the next story arc will consider what changes we might usefully make.
NZ’s high effective marginal tax rates for those at the lower end of the income scale have substantial impacts.
They reduce the incentive for people in receipt of a benefit to move into work, in some cases because each extra hour of work actually reduces household income, in most cases because the government is capturing 75-80% of any additional income. This includes sapping increases to the minimum wage, with government capturing the majority of the increased pay.
These impacts fall heavily on solo parents and on secondary income earners with children, reducing the incentive to work at all, and when they are working, reducing the incentives to seek higher pay rates. This is a consequence of the targeting of many supplementary benefits to those with children.
Solo parents and secondary income earners are disproportionately female, therefore these policies will have the effect of lowering female workforce participation, and of reducing women’s average hourly earnings as compared to men.
The impacts also disproportionately fall on younger people – those who have young children. This means that these people are out of the workforce at a time when we would otherwise expect them to be building work skills. This gap in workforce participation could be expected to follow them for life – their career has been delayed in starting and they are likely to have lower lifetime earnings than they otherwise would, both from the years out of the workforce, but also from lower income later in their career.
These impacts will flow through into savings rates and asset accumulation, in particular with women having lower assets and retirement savings than they might with a system that offered higher incentives to work and to seek increased pay.*
The children of households that are benefit supported will on average have poorer life outcomes than they would if the parent(s) had entered the workforce, or had moved into higher paid roles. This is true even after correcting for demographic backgrounds and household composition. Children in benefit supported households are also disproportionately likely to be living in poverty.
The tax and transfer system also currently discourages household formation. To generalise, as currently structured the system discourages men from joining a household with solo mothers, and discourages solo mothers from having their partners move in. This reduces the stability of those relationships, with consequent poorer life outcomes for the children in those households, but also for both the men and women who have fewer stable relationships than they may otherwise have had.
It would be preferable to have a tax and transfer system that retains strong incentives for the lowest income NZers to enter the workforce, and once in the workforce, to invest in earning increased income. The tax and transfer system should ideally also minimise barriers to household formation.
Having said that, to quote Patrick Nolan, who is in turn quoting John Kay (2017) “it is simply not the case that there are simple solutions to apparently difficult issues which policymakers have hitherto been too stupid or corrupt to implement.”
All policy options in this space have tradeoffs. We may prefer a different set of tradeoffs to those currently in place, but we cannot pretend that those tradeoffs do not exist. Improving incentives will likely either increase programme cost or reduce the support provided to the most needy.
It appears to be a mostly zero sum game – more over here means less over there. The only variable is where changes to incentives change behaviour – fewer people in total on a benefit, more people investing in their future productivity, fewer WINZ staff required case managing beneficiaries. We need to be careful of magical thinking (a la Laffer curve), but there should be some dynamic effect at the margin if we get incentives right.
Upcoming posts will examine the options for changes that might reasonably be made to the system.
* It did occur to me as I was writing this section that the description of impacts on women might also be applied in general to the impacts of childbearing on women. Having children overall reduces women’s workforce participation, reduces their hours of work, and reduces their hourly pay rate, at least for a period of time. That will then flow through into lifetime income, retirement savings etc. Given that the impacts I’m identifying disproportionately fall on households with children – is it really the tax and transfer system that creates these impacts on women, or is childbearing the true underlying cause – given that the impacts happen both to women on a benefit and women in work?
Once again it reminds me that having children is by no means an economic decision, and viewing the impacts of having children through an economic lens may not be particularly informative.