Working for Families versus tax cuts

Essential income assistance? Or trapping low income workers in a ‘handout cycle?

Working For Families was introduced in New Zealand in the 2004 budget of the Clark/Cullen government. It has been both praised and criticised.

It provides tax credits for families with dependent children aged 18 or under who are not in full employment. There are four types of payments:

  • Family tax credit (FTC) is paid regardless of your source of income.
  • In-work tax credit (IWTC) is an additional payment for families who normally work a minimum number of hours each week for salary and wages.
  • Parental tax credit (PTC) helps with the costs of a new baby for the first ten weeks after your baby’s birth.
  • Minimum family tax credit (MFTC) is paid to families earning up to $26,156 (from 1 April 2018) or less after tax to ensure a minimum family income of $503 a week after tax. To get this payment, at least one parent must be working for salary or wages for a minimum number of hours each week.

It is complex – see the Payment Table.

I’m not sure exactly what this means: “The amounts are based on your eldest child being aged 15 years or under and all other children being aged 12 years or under. If you have older children, you may be able to earn more and still be eligible.”

See also from IRD: Types of Working for Families Tax Credits

In opposition John Key referred to Working for Families as ‘communism by stealth’. However when National got into Government in 2008, faced with the Global Financial Crisis they left Working for Families in place and didn’t look like dumping it in their 9 year tenure. This effectively entrenched it.

A difficulty with stopping Working for Families is that it would substantially reduce the income of low income families, or an equivalent income would have to be provided via alternate benefits or tax cuts.

Talking of tax cuts, one person thinks that tax cuts would be a better solution in I’m trapped in a handout cycle, but I’m not a ‘bludger’.

People called me a ‘bludger’ when I spoke out about how a $16,000 pay rise only left me with $50 a week extra in hand, and how Working for Families has kept me in need of Government support. They were wrong, and most missed the point.

I am grateful for the support I get from the Government. I just wish I never received it in the first place.

The point I wanted to make was this: the Working for Families system is broken because it encourages people not to work or seek a higher income. Tax cuts for everyone in work is a better solution.

People missed the point that I am working more to reduce my reliance on Working for Families. If the system was geared towards incentivising working more, or going for that promotion, everyone would win. But it isn’t and this has the negative effect of subsidising wages for a group of people, holding them down for all workers.

Governments seem to prefer to take money off people via taxes, for most people income tax and consumption tax (GST), and then give money back to some.

Working for Families pays out to families in the middle- to high-income bracket. I will not escape the Working for Families trap until I earn around $120,000 a year, and that is not going to happen any time soon.

One significant criticism is that it gives tax credits to relatively high income earners who have children, while keeping income tax and GST high for other working people (employees or in business).

In the meantime, for every dollar I earn, I lose 70 to 85 cents at the other end.

This reduces incentives to work more or earn more.

With a different tax system and wages at the level they should be, I believe most families – including mine – could support themselves with no additional help from the taxpayer.

I don’t want handouts. They reduce the value of my own work and make me feel as though my family’s income is out of my hands. Unfortunately, I am caught in this cycle. Working for Families is such a large proportion of my income that declining the payouts is not an option.

I mentioned tax cuts as a better alternative as I believe allowing people to keep more of the money they earn will motivate them to improve their own situation rather than relying on the taxpayer.

But there seems little chance of any significant change to tax levels or Working for Families.

In the last election, both of the main parties’ answer to “children in poverty” was Working for Families.

The National Government had put tax cuts in place for this year but with no change to Working for Families, and in any case the Labour led government scrapped the tax cuts.

My vote in the next election will go to the party that is brave enough to say there is a better solution, that will also help people who are struggling but don’t have children.

The Government, following Labour policy, is doing a tax review but it doesn’t look like addressing tax levels and Working for Families credits.

There are some interesting comments too, SarahMC:

I am a single mother working all the hours my children are at school, working through some lunchtimes to do more hours, and also working a couple of evenings. When I’m not working, I am caring for my children. I receive a WFF payment. It bothers me that I work extremely hard but I still need a ‘handout’. I work all the available hours possible, but still feel like I’m a drain on society. It’s psychologically draining.

There is also a cost of adminstration – Jantar:

Redistributing income through supplements and handouts does not just penalise those who want to get ahead, it also wastes a lot of the additional tax take required in administration costs.

This comment doesn’t make sense – NewsRanger:

Ahhhh I think you’ll find your $16,000 pay rise left you $16k better off. It also means the taxpayers of New Zealand are $13,400 better off in not having to subsidise you. That money can now be invested in other New Zealanders in need. You didn’t lose anything, it wasn’t yours to start with.

Pre-tax income was their’s to start with, before the Government took most of it.

Gissie:

Surely Working for families is just a subsidy to the employer. Without it businesses would have to either pay a reasonable wage or succumb to the market forces they always bleat about.

Or ask for more low skilled immigration to work below minimum on the promise of residency. All our leaders seem happy with this answer.

BobbyM repeats a commonly made point about ‘corporate welfare’:

These wage top ups are nothing more than corporate welfare, or a taxpayer subsidy in recognition of minimum pay wage rates, It.s the employers that should be ashamed not the recipients of these payments.

It isn’t just ‘corporates’ that benefit from Government income assistance, many people are employed by small businesses.

I think there’s no doubt that Working for Families takes pressure off low wage employers.

However it makes things difficult for workers stuck in low wage jobs who don’t have children,

What’s a ‘living wage’?

That must depend on many factors, including where you live, your age, whether you have a partner or a family, whether anyone else in the household works, available housing and what your expectations are.

A 35 year old living with a non-working partner and family in Auckland will have different requirements to an 18 year old living still at home in Tuatapere, or a 25 year old single person being provided accomodation, power, milk and meat on a dairy farm in Taranaki.

NZ Herald reports on the launch of a campaign for a ‘living wage’.

Battle for a living wage: The pay you need to survive

Almost 750,000 Kiwis look set to be classed as the new working poor this week when the union movement fixes the value of a “living wage” needed to have a decent life here.

The rate, expected to be $18-$20 an hour, has been calculated by researchers at the Anglican Church’s Family Centre in Lower Hutt to be “the income necessary to provide workers and their families with the basic necessities of life”.

About 40 per cent of the country’s 1.85 million employees, or around 740,000 people, earn below that rate – including beginning teachers, chefs, truck drivers, mechanics and carpenters, as well as traditionally low-paid groups such as cleaners, caregivers and checkout operators.

The unions have invited national and overseas researchers to a two-day conference in Auckland on Thursday and Friday to launch the study as the basis of a campaign to lift all wages to the “living wage” level.

What is their calculation of a living wage?

  • $18 per hour – $720 per week  – $37,740 per year
  • $20 per hour – $800 per week  $41,600 per year

That is based on a 40 hour week and on an M tax code.

The effective in the hand amount, taking in to account Working For Families tax credits:

@18

  • no child $600
  • 1 child FTC $685
  • 1 child IWTC $708
  • 2 or more children FTC/IWTC $708

@20

  • no child $665
  • 1 child FTC $735
  • 1 child IWTC $786
  • 2 or more children FTC/IWTC  $786

FTC (Family Tax Credit) – paid regardless of your source of income

IWTC (In Work Tax Credit) – an additional payment for families who normally work a minimum number of hours each week for salary and wages

On the ‘living wage’ you get all tax credited if you have two or more children (the difference is ACC earner premium which is not credited).

Turei questions Dunne on in-work tax credits

In Question Time in Parliament yesterday Metiria Turei questioned Peter Dunne on in-work tax credits. This was just prior to the conclusion of the first reading on her Income Tax (Universalisation of In-Work Tax Credit) Amendment Bill which failed it’s first vote yesterday.

This has been a a loaded debate, with the Green Party promoting the ‘poor children in poverty’ meme.

Metiria Turei: Why will not the Minister support this potential solution at least being considered at select committee, when all the evidence suggests that it could make the crucial difference to a quarter of a million Kiwi kids, and that he today could be the difference between an empty and a full plate for many of these children?

Hon PETER DUNNE: I reject that assertion entirely.

Metiria Turei: You reject those children entirely.

Hon PETER DUNNE: I am not rejecting those children. That is a ridiculous statement.

Video: 7.11.12 – Question 5: Metiria Turei to the Minister of Revenue

Full draft transcript:

5. METIRIA TUREI (Co-Leader—Green) to the Minister of Revenue: How many parents have lost access to the in-work tax credit in the past year because they have lost their jobs or no longer work enough hours to qualify?

Hon PETER DUNNE (Minister of Revenue): The member should not be surprised that my answer is exactly the same as I gave to her written question No. 8951 barely 3 weeks ago—namely, the Inland Revenue Department does not specifically record why a recipient does not receive a particular component of Working for Families tax credits. Entitlement to each component can start and stop throughout the year, depending on the family circumstances, all of which cannot be accurately separated or identified to answer this question.

Metiria Turei: Why is the Minister content to allow this financial support to be taken away from children whose parents lose their jobs through no fault of their own?

Hon PETER DUNNE: What the member overlooks is that there are a range of other support mechanisms in place to help parents in that situation, and as a consequence of those other support mechanisms, the current practice, introduced by the previous Government, with regard to the operation of the in-work tax credit is appropriate.

Metiria Turei: How can the Minister claim that the current support for those families who lose their jobs is adequate for children, when the family tax credits and benefits combined still leave 70 percent of the children in those families in poverty, the jobs do not exist for their parents, and we know that the in-work tax credit amount alone can significantly relieve that poverty?

Hon PETER DUNNE: There are two reasons for my comment. The first is that the OECD has made it very clear in its judgment—and New Zealand is part of the OECD and generally respects its judgments in these respects—that child poverty is best helped through workforce participation and encouraging workforce participation. The second part of my answer is that the member is selective in terms of the benefits that she makes reference to. In addition to those that she commented upon, families in that situation would also be entitled to the unemployment benefit and they may be entitled to sole parent support, an accommodation supplement, an emergency benefit, various training allowances, a child disability allowance or disability allowance, and, possibly, after-school allowances. So if she wants to make the comparison, she should put the whole suite of measures on the table, and not just a selected number of them.

Metiria Turei: Is the Minister aware that every 3 months 75,000 hard-working people, including thousands of parents, become unemployed under the Key-Dunne Government, and how is it fair to take away the in-work tax credit from them and their children when they lose their jobs in those difficult times?

Hon PETER DUNNE: I have got no idea where the member draws her figure from. I think it is a figment of her imagination. The point—

Metiria Turei: From your own ministry.

Hon PETER DUNNE: The member says it is from my own ministry. In my original answer I made it very clear that because of the nature of the way in which these interactions occur it is impossible to identify the numbers involved. The member seems to deny that. But the point that I was making in my original supplementary answer—and I will make it again—is that the member is being very selective. She is drawing on a range of issues only. There are a number of mechanisms available to help families in that situation, and the member should put all of those on the table when considering this question.

Metiria Turei: How is it fair that the children of 40,000 hard-working people who lost manufacturing jobs in the last 4 years of the Key-Dunne Government should also be financially punished by having their in-work tax credit taken away as well?

Hon PETER DUNNE: My answer is the same as it has been to previous iterations of this type of example. But I would make one other point: what the member’s legislation proposes is creating a disincentive for low-income working families to remain in employment. One of the whole reasons why the Working for Families in-work tax credit was introduced in the first place was to actually make it more palatable and more attractive for those low-income families to be in employment. The member wants to actually turn that on its head, and make more people reliant on the system as beneficiaries, rather than do what every other country does and seek to encourage them into paid employment.

Metiria Turei: If the Minister is so worried about incentivising people who work, why does he then deny the tax credit to up to 40 percent of sole parent beneficiaries who are in part-time work, whose children are very likely to suffer the worst effects of long-term poverty?

Hon PETER DUNNE: I should point out to the member that there are a number of other tax credit mechanisms available to help families in the type of situation she refers to—for instance, the family tax credit, the minimum family tax credit, and the parental tax credit. When you add all of those things together—and they are regularly adjusted for inflation—they provide a substantial uplift for families in that situation. They also ensure that low-income working families are recognised for their efforts and, as a consequence, encouraged and incentivised to remain in employment.

Metiria Turei: I raise a point of order, Mr Speaker. My question was not about other kinds of tax credits. It was an explicit question about working people who are denied the in-work tax credit, and I do not believe that the Minister answered that question properly.

Mr SPEAKER: If I recollect correctly, the member started her question with “Given the Minister’s such-and-such, how can it be fair …”, or “How does he believe it is fair for something …”, and the Minister answered that he believed it was fair because these people have other things available to them.

Metiria Turei: Why did the Minister dismiss my compromise to him to extend the in-work tax credit for 6 months to those who lose their jobs—a compromise that would relieve some of the worst financial stress for children and for families at a very difficult and insecure time when their parents lose their work?

Hon PETER DUNNE: Two reasons: firstly, the point I made earlier about employment and encouraging people into workforce participation, and, secondly—again consistent with OECD strategy—employing policies that make work pay. What the member’s bill does is create a disincentive for people at that low-income margin to be in full-time employment. I think that is wrong.

Metiria Turei: Does the Minister agree with economics professor Susan St John that extending the in-work tax credit to all children below the current income threshold, even if their parents are

looking for work, are caring for grandchildren and receive superannuation, or are studying, would be an effective way to reduce poverty and income inequality?

Hon PETER DUNNE: I seldom agree with Associate Professor St John.

Metiria Turei: Does the Minister agree with the statement from United Future leader Peter Dunne when he pledged to Closer Together Whakatata Mai to “actively support policy measures that reduce income inequality”; if so, why will he not support my bill at least to select committee, which is just such a measure he pledged to support?

Hon PETER DUNNE: I do agree with that statement. The fact that as Minister of Revenue over the last 7 years, under both Governments, I have been part of seeing the biggest shifts in personal tax rate reductions for the bottom two income steps is proof of the point that I make.

Metiria Turei: It’s not relieved poverty for the worst.

Hon PETER DUNNE: The member says that does not relieve poverty. What that interjection proves is that this is a highly subjective rather than objective argument. My focus has been on ensuring that our tax system works fairly for those at the bottom of the income scale. The last thing I want to see is a disincentive created for low-income working people to remain in full-time employment, as the member’s bill would do.

Metiria Turei: Why will not the Minister support this potential solution at least being considered at select committee, when all the evidence suggests that it could make the crucial difference to a quarter of a million Kiwi kids, and that he today could be the difference between an empty and a full plate for many of these children?

Hon PETER DUNNE: I reject that assertion entirely.

Metiria Turei: You reject those children entirely.

Hon PETER DUNNE: I am not rejecting those children. That is a ridiculous statement. What this is about is a good policy environment that the previous Government put in place called Working for Families. This Government is committed to it. It ensures that low-income working people are rewarded for the fact that they are in employment, consistent with international standards. The best way to boost the incomes of those households is through full-time employment, not through loading them up on the beneficiary train, which the member wants to do.

Turei’s final speech on her bill: Income Tax (Universalisation of In-Work Tax Credit) Amendment Bill – First Reading – Part 11 ›

More Turei-Dunne disputes on in-work bill

Metiria Turei’s bill to extend in-work tax credits to beneficiaries goes the the first vote tonight. She has tried pressure and co-operation from Peter Dunne to try and get his critical vote.

Turei has already made obviously false claims in parliament, which is an odd way to try and get support, as blogged in How not to get support for your bill:

“I have asked Peter Dunne to consider various options for supporting the bill, but I am advised by his office that he does not consider that the Government can afford to assist the poorest children in New Zealand.”

Newstalk ZB has now reported Debate over in-work tax credits heating up where Turei makes another claim:

United Future MP Peter Dunne says the bill destroys the incentive of Working for Families to get beneficiary families into work.

“I don’t really see there’s much to be gained from having a discussion at a select committee, when there’s such a fundamental difference of view.”

But Metiria Turei says she’s offered major compromises to Mr Dunne to get his support and he’s turned them all down.

According to Dunne that’s an extravagant claim:

It depends what you would define as major. She suggested changes but I saw them as no more than variations on her primary theme.

It’s hard to see what sort of meainingful compromise is possible on this. There is a fundamental flaw with the bill. In-work tax credits were always intended for people ‘in-work’, extending them to beneficiaries seems bizarre, and feedback I’ve had is it would be unpopular amongst working people.

There would have been more chance of success if the bill was designed to give more support to beneficiaries with families. But even then a substantial cost with it’s budget implications would have been unlikely to have been allowed by National.

And it doesn’t address the problem of leaving enough incentive to work if you can get too similar an amount of money on the benefit.

I don’t know if the bill is misguided, a tool for politicking, or a deliberate attempt to redefine being on a benefit as a different kind of in-work.

Why Dunne opposes Green universal tax credit bill

Peter Dunne has been targeted for a vital vote for Metirea Turei’s bill that is attempting to extend Working For Families tax credits to beneficiaries.

Dunne has confirmed his position on the bill.

Why I oppose the Greens’ Bill to universalise the In-Work Tax Credit

The Greens’ Bill to universalise the In-work Tax credit payable under Working for Families comes before Parliamenrt again tomorrow evening.

I will not be supporting it for the following reason.

When Working for Families was introduced by the Labour government in 2004, there was provision for what became known as the In-work Tax Credit to be payable in addition to normal Working for Families entitlements to low-income working families to incentivise their remaining in the workforce, rather than going on a benefit. I supported that concept than, and I do now.

Making the In-Work Tax Credit universal – in other words, extending it to all those, working or not – distorts its original concept, and I do not support that.  It sends an unfortunate signal to low income working families about the value of their work, which I think it wrong.

I believe there needs to be recognition of the hard-working efforts of low income families, and the existing In-work Tax Credit is a way of achieving that.

That is why I continue to support that recognition, by opposing the Greens’ Bill.

Even if Dunne voted for the bill it is very unlikely National would allow it to escape a veto due to substantial cost and budget implications.

 

Budget: the paper boy pinch

It’s not pinching from kids, some politicians while pinch themselves when they realise they’ve gone off half cocked on this.

Much has been made of taking a tax credit away from children, like paper boys and paper girls. The critics have been a bit premature jumping in on this, including a lineup from Labour (I’ve heard David Shearer, Grant Robertson, David Parker, David Cunliffe and David Clark), and Winston Peters. Either that or they are deliberately trying to mislead.

From Peter Dunne’s speech in the house today:

These transitional rules will provide employers with time to update their payroll systems.

I have described these tax credits as out-dated, Mr Speaker.  Allow me to illustrate.

When the tax credit for income under $9,880 for example, was first introduced, it was aimed at people on a fulltime annual salary of less than $10,000.

Times and salaries have moved on significantly since that time, and the tax credit no longer applies to the group it was originally established to support.

Similarly, the child tax credit was a transitional measure introduced by Sir Robert Muldoon in 1978 – in an era when most employers did not deduct tax at source.

Now they do, so the credit has become similarly outdated.

So they tax credit changes are tidying up old obsolete tax law.

And the “paper boys” argument is a myth. Those who deliver suburban papers most likely earn under the $2,340 exemption.