Should we cut taxes or spend more?

Alternatives to the Government's big-spending Working for Families package boil down to tax cuts or making it more generous.

At one end of the spectrum Act is arguing for a flat tax rate. National, meanwhile, would keep the $1.1 billion a year package but modify it and introduce its own tax cuts for middle-income earners.

And at the other end the Greens and poverty campaigners say the package discriminates against beneficiary parents because it aims tax credits at the lowly paid working family while those on welfare benefits largely miss out.

National would keep Working for Families but modify it to keep some form of income guarantee for the lower paid - and introduce tax cuts for middle-income earners.

Finance spokesman John Key wants to avoid "social engineering". By extending assistance up the income scale he argues it is also extending welfare dependency to more people.

"The Government does not care about raising living standards. Its whole focus here is on what is the required amount of money they think is appropriate to bring up a family.

"Whether that comes from a benefit or paid employment or a government subsidy, they are ambivalent."

And he is concerned about the impact of effective marginal tax rates, which dramatically narrows the gap between what two families earning vastly different incomes take home. Mr Key says high effective marginal tax rates blunt the incentive for people to work harder.

The Government scoffs at such arguments and says tax cuts are far too blunt, with most gains going to the rich.

Finance Minister Michael Cullen pointed out last year a family with four children on $55,000 would get $149.77 more from the package by 2007. To get the same benefit from a flat tax would require a rate of about 9.5 per cent and cost $15.9 billion.

Mr Key says tax cuts can be structured so people won't miss out.

However, he also acknowledges there will be losers - as well as winners - under National's plans.

As to what National's plans actually are, details won't be announced until after the May Budget. All he will say is it will cost hundreds of millions of dollars.

Mr Key is also concerned many will get into debt with the state, like more than a million families did in Australia under a similar system.

Working for Families is a tax credit system that requires people to correctly assess their total household income - and if they underestimate they have to repay money they are not entitled to. In the first two years of the Australian system 1.3 million families owed more than A$1 billion and the Government was forced to write it off.

The Government has batted off such concerns, however, saying the issue has been thought through by Inland Revenue.

Act also calls for tax cuts. Leader Rodney Hide says its plans - which has the long-term goal of a 20 per cent flat tax rate - would benefit all workers. He says the trouble with the package is that "Helen Clark's deciding who gets some of their own money back. We think people should just keep the money they earn".

At the other end of the spectrum the vocal Child Poverty Action Group wants Working for Families changed so it doesn't discriminate against beneficiaries.

In a report published last November, Susan St John and David Craig accused the Government of producing a flawed package, further entrenching an underclass that includes 175,000 of the country's poorest kids.

The report says the Government should adopt specific child poverty reduction policies and stop discriminating on the basis of a family's income source.

Ms St John, an Auckland University economist and spokeswoman for the group, says ministers missed an opportunity to do something visionary for all low income people. She argues that redesigning the package need not cost more and would tackle poverty as well as providing work incentives.

"We are getting too hung up on the cost. A lot of that [new] spending is simply adjustment for inflation and is not real redistribution, and real redistribution is what's required.

"But the Government should have spent a lot more on Family Support last year and the year before and the year before ... so they've saved a lot of money by leaving it so late.

"There's a case for compensation of some kind because of that long catch-up."

Green Party co-leader Rod Donald says they also want to end discrimination against beneficiaries.

The Greens would reintroduce a universal child tax credit - of $15 a week for the first child and $10 for each subsequent child. The crude estimate of the cost is about $600 million.

The party also wants to lift the minimum wage, arguing the package is in fact corporate welfare that covers for low wage rates.

Ms St John points out that although the package boosts incomes for low-to-middle income earners - especially those in work - it actually includes a benefit cut of $17 a week for a couple and $21 a week for sole parents with two or more children.

"The carve-out of the child-related component of core benefits makes the package much less generous than it appears for the poorest children."

She says making families on benefits "desperately poor" to force them to work is counterproductive.

Working for Families

* Major changes to family assistance and other subsidies come into force on April 1, including:
* Family Support up $25 a week for first child and $15 for each other child.
* Main welfare benefits for majority of families down $17-$21 a week.
* Special benefit top-ups down by an average of $13.50 a week.
* Higher maximum accommodation supplement rates in urban areas.

More information www.workingforfamilies.govt.nz and www.ird.govt.nz/familyassistance/
Family assistance: Phone 0800-227-773. An online calculator is at www.ird.govt.nz/calculators/keyword/familyassistance/
Accommodation supplement and childcare assistance: phone 0800-774-004