Analysis by Keith Rankin
Wednesday I wrote Department of Mum and Dad (Scoop 14 Aug 2024, or here on Evening Report). I finished by saying that, today, “I will propose a simple affordable solution which better fits centre-right than centre-left philosophies”. Here goes.
My proposal is to pay a personal tax credit of $150 per week to every New Zealand resident aged over 18. The principal mechanism to pay for this would be to remove the 10.5% and 17.5% income tax brackets. The result would be that every New Zealander earning $53,500 or more (per year, before tax) would have an unchanged after-tax income, while some people earning less would get more. The $150 per week is a simple measure of the maximum benefit implicit in those two lower tax brackets.
The second mechanism to fund the PTC is to account for upto the first $150 per week of income support benefits as a personal tax credit. Thus, present beneficiaries would have unchanged weekly disposable incomes.
There would be some minor complexities relating to people who would not be considered to be fulltime beneficiaries. So, for the purposes of this policy proposal:
- Working for Families, the Independent Earner Tax Credit, and New Zealand Superannuation would be classed as benefit income.
- People today earning less than $53,500 before tax would get more than they do now only if they are receiving nil or trivial benefit income.
For an example, a person working 30 hours each week at the minimum wage would have a weekly pre-tax income of at least $694.50; $36,114 per year. Persons grossing this amount with no benefit income would become $42.19 better off with a PTC. If they receive benefits (as defined in the first bullet point above) in excess of $42.19, then the first $42.19 of benefit income would be accounted for as ‘PTC’ rather than as ‘Benefit’. (Such minimum wage workers receiving weekly benefit income above zero but below $42.19 would no longer be receiving benefit income because the PTC would more than compensate for lost benefit.)
Another class of ‘static beneficiary’ of the PTC would be non-employed working-age ‘spouses’ living with their partners, and contributing to society in ways other than labour force participation. They may be caregivers, volunteers, underemployed free-lancers, or start-up entrepreneurs.
Or they may be people recently made redundant. Here we are starting to appreciate the possibilities for the dynamic benefits of the PTC. Today’s recently redundant spouses may be tomorrow’s social or capitalistic entrepreneurs.
Dynamic benefits, which fit near-right philosophies of self-reliance and basic democratic rights
The general idea is that of a hand-up rather than a handout. Though basic democratic rights go beyond that concept of charity; the unconditional $150 (which should be subject to CPI indexation) would be conceived as a democratic right in the same sense as the ‘right to vote’.
The dynamic benefits of this proposal are the ‘behavioural changes’; in particular the substantial reductions of the ‘moral hazards’ inherent in any regime of targeted income-support.
Because the $150 weekly PTC would be received an unconditional right, there would be only minimal bureaucracy required to administer it; that would be a substantial cost saving.
The Department of Mum and Dad could be sure that they would receive at least $150 per week in ‘board’ money for each adult child supported in part or in full by Mum and/or Dad. This would take pressure off Mums and Dads with bougie (ie ‘entitled’) adult children.
Many people hate being clients of MSD. They would prefer to be reliant on their own efforts, and on their private and civil society networks. Under the PTC policy regime, new applicants for income support would decline substantially, with remaining applicants for benefit support being the most needy persons and families.
Personal tax credits could be paid – especially for the cases of adult children living ‘at home’ – directly to accommodation providers (eg Mum or Dad) as contributions to the recipients’ board or rent.
The key point is that newly unemployed persons would retain their weekly entitlements of $150 per week, enough to tide many of them over without having to become beneficiaries. And people who are present beneficiaries would be able to ‘dip their toes’ into the part-time labour force without losing all their present support; targeted support that today incentivises them to continue as beneficiaries. The PTC is an ‘enabling’ rather than a ‘disabling’ form of benefit.
Another way of putting it is that the PTC proposal creates a better balance between ‘carrot’ and ‘stick’. The PTC is the carrot.
Note
We may note that there were ‘personal tax credits’ in New Zealand from the 1973 to 1978 Budgets. They were not the same as my proposed PTC, in that those payments would be ‘upto’ a certain amount rather than the full amount for all. The 1970s’ version failed mainly because they were not adequately indexed to the inflation of that time; and also because they were not enshrined as a democratic right.
Conclusion
If the present government does not pursue this policy, it would be ‘cutting off its nose to spite its face’. The new regime of benefit sanctions is the ‘cutting of the nose’ part. The non-realisation of dynamic benefits by not implementing the policy would be the ‘spiting of the face’.
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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.
