When Work and Marriage Do Not Pay

1. When Work and Marriage Do Not Pay Poverty Traps and Marriage Penalties in New Zealand’s Tax-Benefit System Presented to the NZAE Conference Wellington, 9 July 2008 By Patrick Nolan

2. Structure of presentation • Definitions • Policy context • Selected results • Conclusions

3. Definitions • Poverty traps: a range of hours of work where, due to taxation and clawback of assistance, there are few financial incentives to work or increase work effort • Marriage penalties: where two parents (spouses) have a higher total income (net of income transfers and living costs) when separated than when a partnered unit

4. Why these problems arise • Complex interaction of a wide range of tax-benefit programmes • These programmes include: personal income tax scale, ACC earners’ levy, Working for Families Tax Credits, main welfare benefits, Accommodation Supplement and Child Support

5. Policy context • The tax-benefit interface is central to New Zealand’s welfare state • Personal tax revenue of $23 billion (of total tax revenue of $40 billion) • Expenditure on social security and welfare (incl. departmental expenditure) of $18 billion (c.f. $11 billion on health, $10 billion on education)

6. Policy context • Ongoing social changes mean that even if tax-benefit programmes have appeared well designed in the past, existing approaches require ongoing evaluation • Increasing diversity of families • Labour market changes • More complex (and greater interaction of) tax-benefit programmes

7. Policy context • Two major changes to the tax-benefit system this century have been Working for Families and fiscal drag • Both estimated to be of similar fiscal magnitude • Middle-to-low income households with children have been the key winners (in terms of net income growth) over this period • Partnered and single people without children, and higher income households with children have fared less well

8. Selected results

9. Selected results

10. Selected results • Marriage penalties include Child Support and reductions in rental expenses from partnering. Families assumed to have two children under 13 • Mother and father no market earnings • Marriage penalty of 29.6 percent of net income • Falling to 8.4 percent when Child Support and accommodation expenses are taken into account • This means the two parents are 8.4 percent ‘better off’ when separated than when partnered

11. Selected results • Mother has no earnings and father earns $52,000 • Marriage penalty of 41.6 percent of net income • Falling to 23.2 percent when Child Support and accommodation expenses are taken into account • Mother earns $12,480 and father has no market earnings • Marriage penalty of 37.6 percent of net income • Falling to 18.4 percent when Child Support and accommodation expenses are taken into account

12. Selected results • Mother earns $12,480 and father earns $52,000 • Marriage penalty of 43.6 percent of net income • Falling to 17.2 percent when Child Support and accommodation expenses are taken into account

13. Conclusions • Poverty traps are higher for families without children at lower income levels, but higher for families with children at mid-income levels (due to later abatement and higher levels of child-based assistance)

14. Conclusions • Marriage penalties are higher for families with children than for families without (reflecting provision of targeted assistance) • Marriage penalties are higher the greater the disparity between the primary and secondary earners’ incomes

15. Conclusions • No system of targeting can completely avoid the incidence of poor financial incentives • Over the last two decades a corollary to the greater targeting of spending was a simpler personal income tax system

16. Conclusions • Recent years have seen greater complexity in the tax system but little (or no) simplification of spending programmes • If these trends continue we will see further increases in complexity, targeting costs, and incentive problems