Have we already gone too far down the hammock road

Discussions about the DPB have been doing the rounds. It seems The Grey Shade has been offline for the last few days doing some research and calculations on how much people will earn under various benefit low income scenarios. Whilst the calculations are welcome, the conclusions are seriously flawed and apparently in contradiction with his observations in passing.

"In NZ we try to minimise child poverty and benefits (particularly for families) are set at a level designed to achieve that. The circumstances of low-income working families are little different to beneficiaries so any objection to beneficiaries having children should, to be consistent, also apply to low-income working families. This point is strengthened by considering that many working families may, in fact, be classified as beneficiaries. Consider a single-income two-parent family with two children paying $200 pw rent in Napier. If they eanr $560 per week they will still be eligible (just) for an unemployment benefit of about $7 per week (plus accommodation supplement and family support). They would have a disposable income (after rent, tax and benefits) of $365 pw but would be classed as beneficiaries (if they bothered to apply or were already on it). On the minimum wage ($320 per week?) the unemployment benefit would be $174 per week and the disposable income $334 pw. With incomes of $80 pw or less the benefit is unabated at $330 pw and the disposable income will range from $223-285. Single-income two-parent beneficiary families with two children, living in secondary centres and paying $200 pw accommodation costs, therefore have weekly disposable incomes in he range $223 - 365 (with most over $285). On the average wage ($40,000 py) the disposable income increases to only $414. Hardly enough to define the difference between poverty and plenty...."

"United Future's income-splitting policy would also help but only a complete move to a universal "basic income" system will restore complete fairness to families (and others). Such a move would have the interesting side effect of eliminating the (increasingly artificial) distinction between beneficiaries and workers thereby making Judy Turner's press release and this posting impossible.
"

So we have a well set out argument showing there is very little difference at the margin for a working person between full reliance on the state and someone on the average wage.

His "Hardly enough to define the difference between poverty and plenty" highlight the very problem that New Zealand is faced with. Compared to its average incomes there is an over generous system of benefits that drains any incentive to work. For those capable of earning say 80% of the average wage, they may as well take a benefit and work 10 hours a week for cash. The difference between $414 and the upper range of beneficiary incomes of $365/week is only $49. They would be far better off working 10 hours at $10/hr and having the rest of the week off.

Fundamentally flawed incentives. And like so many of the left the wrong conclusions are drawn.

Greyshade cites Keith Rankins, universal benefit, which skirts quickly over the disincentives to work posed by high beneficiary income compared to work.
There should be a clear and substantial gap between benefits unearned and wages paid. There should also be reasonable time limits on benefits. In that we differ.

Comments

[Jordan]

Sage - I don't have any in principle problem with a gap between wage earners and beneficiaries, so long as the latter are at a level of income that allows their participation in society.

Question - would you cut benefits, or increase wages, to widen the gap?

The biggest problem in creating such a gap is the means-tested benefit system we have in this country. That is what creates ridiculously high abatement rates (effective marginal tax rates) for middle income families. If we had universal things like, for example, a child benefit, then the gap between working and not working would be a) bigger and b) more consistent, because other things would be less likely to abate away as your wage income increased...

fixing this is a very expensive and therefore slow process, unless you do it by just cutting the incomes of low income families, and nobody seems to want to do that (thank goodness)....

interested in your response.

[sagenz]

helen is playing with "poverty" levels around 50%, or should it be 60%. My thoughts are that 2 years on a benefit is quite long enough for anyone in our low unemployment environment. I also think that being on a benefit should, by definition, mean living in poverty. If that maxes out at somewhat less than 50% of the minimum wage, with children, then that is a state that could be got to with plenty of lead time. like around 12 months notice.
I have a degree of sympathy with the idea of state subsidised child care, basically extending the hours for which schools and kindergartens will remain rsponsible for children. I have seen it in action with my own children in hungary and it allows a flexible and much earlier return to the workforce.
In context of this discussion you are talking about splitting the child benefit from the income compensation. We are then back to the misincentives. Encouraging, young, immature women with no discernable skills to have children as the state will provide them with income and independence, seems to me the height of state sponsored irresponsibility.

The abatement rates are there because successions of politicians have insisted on pushing up benefit rates from the bottom. My solution would be to hold benefit rates for a period, say six months and then have them abate steadily to the point where they are worth nothing after 2 years. Nobody can honestly say that with the official unemployment rate of only 68,000 that there is not now something approaching full effective employment.

[Greyshade]

The conclusions I thought I came to were
(1) A significant number of "beneficiary families" have one parent fully employed
(2) The low margin between unemployed beneficiaries, "employed" low wage beneficiaries and average wage non-beneficiaries means that we shouldn't expect to see much differences in the number or spacing of their children
(3) A Universal system would be much better

I don't see how any of these are inconsistent with my observations.

One point of clarification is that my figures don't include the Working for Families measures. I was primarily seeking to explain the behaviour of contemporary "beneficiaries" and this will obviously not be influenced by measures that have yet to come into effect.

Working for families will geatly improve the margins of workers over beneficiaries and will make it much more likely that they will seek to return to work (or increase their hours). It's also a step towards a universal system in that family support is now paid to a larger number of families. This reduces the extra cost of extending it to all families (with dependent children).

Might I suggest a useful next step would be to exempt all (or a portion) of family support from abatement where the youngest child is under 5.

[sagenz]

Your point 3) is the issue and the important one. Also "only a complete move to a universal "basic income" system will restore complete fairness to families"

The issue completely unaddressed is the disincentive to work at the margin. Everyone at a lower level earns the same or similar. If you or Rankin have addressed this issue specifically , please point out to me where. The UBI is flawed for that reason alone.

[Greyshade]

If you look at the pdf on the sidebar of my blog (ie www.offsys.http://www.offsys.co.nz/RealTaxRates.pdf) you'll see my proposed UMR system. This paper predates the working for families package. The basic point is that the UMR is a BI/FT (Basic Income / Flat Tax) with the characteristics that

(1) Every individual adult receives a basic income which reflects their age, location, dependent children, etc.
(2) All income is taxed at the universal rate.
(3) No government benefits in cash or kind are means tested in any way.

If the basic income for a single person is set to $8500 and the universal rate is 45% then an unemployed person earning nothing will get $8500. If the earn $10,000 they will get $8500 + (1-0.45) 10,000 = 14,000 and so on. Every $100 they earn leaves them $55 better off whether they earn 0 or 1,000,000.

Keith Rankin is essentially advocating the same thing but uses different terminology. The actual tabulated and plotted examples in the reference I gave you, he is showing the current situation but advocating that the "LIS" should be eliminated (or that the "full SWTC" should be paid to eveyone). This is equivalent to a BI of $3933 and a universal tax rate of 33%.

I can easily understand the confusion here and I think Rankin (and others) even allude to systems where the BI is set as a minimum (ie effective tax rate of 100% for incomes below the BI. These systems can be called BI but not BI/FT and certainly not UMR or UBI. I don't believe Rankin advocates such systems - I certainly don't.

If you get a chance to read the UMR pdf I'd be glad to hear your thoughts.

[sagenz]

I have previously read the UMR. An interesting theory but the suggested 45% tax rate essentially makes it a non starter politically. The numbers just do not feel right when ACT are suggesting they could get to 20% flat tax and a zero tax threshold as is being suggested for the US.

Your scheme would appear to require almost twice the tax rate as well as generating a deficit.
If you have detailed costings for the charts outside of pdf I would be most interested to review.

[Greyshade]

Phil

I've responded to your EMail with my working spreadsheet and responses to your more specific queries. The reason for the higher tax rate compared to ACT's flat tax is that it is an "effective" rather than "nominal rate". The 20% flat rate will only be possible if we
(1) set benefits to very low levels
(2) abate benefits sharply leading to very high marginal rates for people within the abatement range.
The present top "nominal" rate is 39% but most NZers pay much higher effective rates. A single person with no dependents pays 47% at 30,000 dropping to 38.41% at 60,000 and thereafter remains fractionally under 39%. A single income two-parent family pays 67.6% at 40,000 dropping to 49.2% at $100,000. It appraoches 39% only at infinite earnings and doesn't get down to 45% until earnings of $167,000. And that's without considering accommodation supplement, community service cards or student allowances.

My Plan B doesn't actually take us into deficit. It reduces the surplus by about 1.7 b. Since it solves 70% of the problem with future superannuation problems, however, we no longer need the Cullen Fund and so I consider it fiscaly neutral.

[sagenz]

greyshade - I would suggest that you are confusing investment with expenditure, not fiscally neutral. Plan 2 still requires more expenditure than current.
your scheme seems to be overly generous at a basic level. I would suggest time limits on unearned income needs to be flexed in.

[Greyshade]

Phil

A change to plan B costs about the same as the Cullen fund and achieves the same purpose (funding demographic "bulge" for future super). Actually as I've pointed out in my latest EMail I mistakenly interpreted Treasury's individual taxable income table as "all taxpayers" (ie including companies) and consequently underestimated the tax base by 17 billion. That means the scheme would be "fiscally neutral" at a rate of 36%.

[geniusnz]

> My thoughts are that 2 years on a benefit is quite long enough for anyone in our low unemployment environment.

The problem (as just left has noted) is that some people REALLY ARE stupid - or handicaped and thus are unable to find employment as easily as the rest of us. In an efficient market certain people would be basically unemployed because it would be almost impossible to find a useful purpose for them that earned a living wage and employing them may well in most situations have a negitive value - i.e they cause more damage to your company by screwing up or being unpredictable or giving a bad reputation or it will cost more to train them than they will ever be worth or it just is not worth the risk that any of these things will happen.
these people make up a portion of our chronically unemployed - I am not sure how much of course.

If that is the case there is no level of incentive that can get them into work - the "best" you can do is push their care onto charity. But that is of course only an issue with the "anyone" part of that sentance.

> I also think that being on a benefit should, by definition, mean living in poverty.

It is basically - after all every country changes its definition of poverty as it develops. besides as you said if poverty is no TV (apparently it is) then I have no major issue with that. basic needs are acceptable amounts of food water shelter clothing basic health care etc - washing machines TV's etc are extras.

> I have a degree of sympathy with the idea of state subsidised child care, basically extending the hours for which schools and kindergartens will remain rsponsible for children.

I agree - where it is efficient to do so ofcourse.

[lokerman]

Good day

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What do you think about it?

Mine
youtube.com/watch?v=j_aONMdkzxU

Original for those that may not have seen it
youtube.com/watch?v=0WW8flwpH-Q

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