A PERSISTENT POVERTY TRAP
by Simon Collins
Wellington's City Voice editor examines party policies effecting the income of the unemployed and other beneficiaries.
- PUT YOURSELF in the shoes of Jane and John Smith.
You've got two children under five, and you've recently bought your first house with a mortgage that costs you just over $1000 a month, or $250 a week.
Jane stopped work when their first baby came. Now John has lost his job in a restructuring. The only job he can get is part-time, paying $200 gross a week.
"That's great," you might think. "At least that's $200 towards the household budget."
But look at the table on 'The Smiths' choice'. The family is getting a net $421.36 a week on the dole, including family support and accommodation supplement.
If John Smith takes the $200 job, the family's unemployment benefit will drop, and after paying tax on the extra $200 there will be only $485.80 in the hand. That's only $64.44 extra.
But it gets worse. If John's new employer offers to double his hours and pay him $400 a week, the family would end up with less than $10 extra: $495.03.
It's a classic 'poverty trap'. Once you end up on a benefit, the system makes you a mug to get off it.
Labour, NZ First and the Alliance would all respond by raising benefit levels and reducing them more gradually as people's incomes rise. But in all cases, at certain incomes, the Smiths would still be worse off if they earn more.
|The Smith's Choice|
Net weekly income for a Wellington couple with two children
and weekly mortgage payments of $250
1st 3 mths
|Source -- City Voice|
- On the left, the ALLIANCE promises higher benefits for people who are on welfare for more than three months.
Taxes would range from zero on the first $4600 of annual income up to 49% above $50,000 a year. (The existing, more 'flat' tax scale ranges from 15% under $9500 to 33% above $34,200). GST would be abolished.
The Alliance would investigate a Universal Basic Income - a benefit for everybody whether they work or not. Paradoxically, this would make it more worthwhile for the Smiths to work, because they wouldn't have benefits taken off them if they get a job.
- LABOUR also proposes higher benefits. Its tax rates would range from 8% below $14,000 to 39% above $60,000.
The bottom tax rate of 8% would be used to build a Superannuation Fund to give more certainty to state pensions. Funds would be saved collectively rather than in the names of the individuals who contributed them.
- NATIONAL promises a second round of tax cuts and family support increases next July.
Both rounds of its tax cuts have targeted the middle income tax rate, covering income between $9500 and around $30,000 a year. The effective tax rate on this income band was cut from 28% to 24% last month, and is planned to drop to 21% next July.
Family support is being raised, in two steps, by $5 per child per week for beneficiaries, and by $20 per child per week for working families. But National has no plans to raise other benefits.
- The alternative conservative party, NZ FIRST, would make all the unemployed work for their keep.
It would honour National's two rounds of tax and family support changes.
The Accommodation Supplement would be go up 20%, and the Special Benefit would change so people no longer have to meet the first $10 shortfall in their weekly budgets themselves.
There would be a true compulsory contributory super scheme. Everyone would have to pay into either a state scheme or a private scheme, starting at 3% of gross incomes next year and rising quickly to 8% (the amount used in the table). The first $5000 of annual income would be exempt.
- And on the right, ACT also favours a compulsory super scheme. It would abolish income tax for families like the Smiths up to an income of $24,731 a year, apart from the 7% super contribution. Above that it would charge a flat 19.5%, including super.
ACT's approach would make paid work worthwhile for the Smiths. Cutting income tax would obviously leave more in the hand.
However even ACT proposes a 'guaranteed minimum family income' of $24,731 a year for a fulltime working family with two children.
This would make it more worthwhile for John Smith to take up that fulltime job at $400 a week ($20,800 a year) - the state would then top up the family income to $24,731. But once he's in the job, any extra earnings would just reduce the state top-up by the same amount.
- Neither the CHRISTIAN COALITION nor UNITED promise big changes in welfare or taxes. Although the Christians advocate "a gradual transition to a personal contributory system", they do not call for compulsory savings and suggest tax incentives instead. They advocate greater family responsibility, highly targeted benefits, and lower taxes.
Source -- City Voice 29 August 1996 "A persistent poverty trap" by Simon Collins. The City Voice articles are now available on the internet at http://www.cityvoice.co.nz/
- see also the Jobs Letter special issue on
party policies for Election '96.
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