Richard Inder: Families tax package is middle class welfare

If business ever needed a reason not to vote Labour, its plan to extend the Working for Families tax package is it.

The package in its original form, introduced last year, is bad enough. But this week's extension will hobble New Zealand's attempts to make it into the top echelons of the world's most wealthy nations.

More to the point, it could very well make the country poorer.

Consider its effects on the typical family - one or two parents and two children.

Before the Working for Families package as originally conceived last year, the family received a variety of welfare benefits. These were reduced as household income increased.

As a result, every extra dollar earned between $20,400 and $42,000 was effectively taxed between 39 per cent and, in many cases, above 60 per cent. (The exact rate is difficult to generalise as the effective tax rates rise as income increases and are dependent on the forms of assistance provided).

However, after the household income passed beyond $42,000, the tax rate dropped sharply to the nominal 33c in the dollar.

Under the plan unveiled this week, the magic threshold rises to $81,500. Up to that point, the typical family will weather tax rates of up to 59 per cent as the panoply of benefits are clawed back.

Once the family passes $81,500, they will suddenly notice a big increase in the real value of pay rises. (For a four-child family, the threshold is much higher - $109,000)

The bottom line is this. A two-child family earning between $60,000 and $81,000 will see their effective tax rates rise from 39 per cent to 59 per cent.

Certainly many may feel better off initially with the extra cash in their pockets. But the incentives to seek a promotion, do more overtime or train outside work for a better job will be much reduced. Any increase in work will not be matched by increases in income they would have enjoyed had the status quo remained.

More to the point, this is not income redistribution for those in need - the poor, the sick and the elderly.

Before the Working for Families package, half New Zealand families enjoyed the nominal tax rates of 33 per cent up to $60,000 and 39 per cent thereafter. (Around 49 per cent of families earn under $40,000.)

Labour's proposal tips the balance in favour of welfare dependency because, if implemented, it will capture almost 80 per cent of all families.

Put another another way, a much larger chunk of the population has been given a big incentive to spend more time at home. The Working for Families tax package is welfare for the middle class.

Business and New Zealanders will feel an initial boost as the surpluses, built up largely as a result of the structural reforms initiated by Labour-led governments in the late 80s and continued in the 90s by the National-led governments, are redistributed.

But the longer-term consequences of this package cannot be underestimated. During the past two decades, deregulation has encouraged a culture of innovation and self-reliance. New Zealand is richer and more vibrant as a result.

Labour's proposal will wind back many of those gains. By bringing so many more people on to welfare, it will foster a culture of dependency.

Creative energy that could otherwise be directed towards entrepreneurship and innovation will be diverted into manipulating the system. The black economy - cash jobs - will thrive.

The package also blows Labour's credibility as an economic manager. Three months ago, Finance Minister Michael Cullen declared the cupboard was largely bare. But just a month out from an election, his party promises a lolly scramble worth, so far, almost a billion a year. This U-turn is either an indictment on Cullen's ability to predict the course of the Government's accounts or proof of cynical electioneering.

The new-found cash used to justify this Labour's largesse comes from business - tax on profits. Set aside for a moment the fact that business will bear the brunt of the proposal, it is also by no means clear business can continue to deliver as it has. New Zealand is entering a downturn and the cash could just as easily dry up.

Finally, the proposal is inefficient. The recycling of cash through the Inland Revenue to administer the benefits that range from the Kafka-esque "In Work Payment" to the Accommodation Supplement and Family Support is a dead-weight drag on the economy.

The picture, however, is not all gloomy so don't start packing for Perth just yet.

The Labour promises have consigned to the dustbin arguments that there is no room for tax cuts.

The Government has effectively agreed there is room for at least a billion dollars of tax relief.

This clears the way for National to produce a package of tax cuts. Businesses can only hope voters will look past the immediate boost to their back pockets and recognise the long-term consequences of Labour's flawed policy.