Labour and the Green Party are not the only ones who care about poverty

Gareth MorganTax and Welfare

Dear Lefties, despite your denial, most New Zealanders care about poverty – but not for your proposed solution.

I do care about poverty

Given my recent comments about the state of the Left in New Zealand, I have had many questions about whether I care about either inequality or poverty. There is much written overseas, particularly in the US, about the growing income gap, although the NZ data shows that has not been the case here since the mid 1990s. To be honest I find the whole inequality debate a bit shallow. That’s not to deny that NZ is seeing a growing number of people struggling to make ends meet, many of who are in the paid workforce. If wages are no longer enough to live on then there is clearly a problem.

But not the solutions offered by the Left

What matters is how to solve that issue. The Left recommend raising wages, as though the employment effects of that either don’t exist or don’t matter. They point to studies that show moderate rises in the minimum wage have no impact on employment. This evidence is used to leap to the false conclusion that you can legislate poverty out of existence by decree without impacting on jobs – naive.

Minimum wages do matter, now more than any time in recent memory because of the increased international mobility of capital and the power of automation technologies. In other words if people get too expensive, businesses can move overseas or replace them with robots and online services. The voting public accepts this – just another reason the Left lost even further ground at the last election. Like most regulation, minimum wages only exist to stop the worst abuses by the dregs of businesses – those employers unfit to employ people anyway.

We do need to do something

Nevertheless a government that wishes to remain in power won’t do so by standing aside and doing nothing, hoping it all self-corrects in the end. In the financial market bubble conditions of pre-2007 some households could avoid the reality of insufficient income by ‘eating their houses’ (using debt to increase their spending on the back of rising house prices). Without that option, we are certain to see the sombre spectre of more and more households struggling to make ends meet.

But Working for Families isn’t working

Both National and Labour have recognised this and Working for Families (WFF) introduced by Labour in 2004 has been the policy adopted to address the conundrum of inadequate income from paid work. But WFF is riddled with selection and incentive issues, which illustrate that it provides no real answer. For example:

  1. who decides what form a family should take in order to be eligible for WFF?
  2. the insidious poverty trap that it creates, because the WFF payment reduces when wages rise.

The problem with targeting

The problem with a benefit regime that is founded on identifying and targeting need, is that the targeting criteria it requires are always open to criticism. This is bad enough when beneficiaries are just a small group but becomes a fatal flaw when the system needs to supplement the income of a large swathe of the paid workforce. When so many beneficiaries are caught in the net, these very high effective marginal tax rates have a massive impact.

Why? For the same reason that very high tax rates on higher incomes don’t work – people lose the incentive to seek a higher income and/or they cheat the system, finding loopholes in the tax or benefit regime.

We need to rethink the tax and benefit system

So in the face of this global trend (global at least in the sense its crawling across all developed economies), we need a total rethink of our tax and benefit regime. Raising tax rates to ultra high levels in an attempt to raise more tax is no more acceptable than expanding the targeted benefit regime across more and more of the population. And as it happens, neither is necessary either.

If we care about a growing proportion of our population having stagnant or falling real incomes when overall GDP (or national income) is rising, we have to find an answer. Thankfully we have an answer – and it is to expand the tax base and the benefit base, not to ramp up tax or benefit rates.

An Unconditional Basic Income

Let’s go back to basics. New Zealand, on most measures, is a rich country. By definition then there is no reason that everybody shouldn’t have enough to live on. If we start with that as a given, then the goal is finding a way to ensure nobody goes without, but we must avoid destroying the market and political mechanisms that have made us so rich. Accepting that everybody has a right to live a dignified life is the first step. Accepting that this is a right, not a privilege – and so is an unqualified entitlement – is the second. From this flows the philosophical justification for a UBI (Unconditional Basic Income). Everybody gets the UBI, no questions asked.

Why higher income taxes aren’t the answer

Second, for this to work we need to accept two principles about tax. Firstly that a progressive tax regime (higher tax rates on people that earn more income) isn’t overly smart. People tax dodge and/or don’t strive as determinedly to raise their income when government pinches most of it. But on the other hand a tax regime that has huge loopholes in it is a terrible affront to fairness and distorts no end how investors invest their money. Our current tax regime is such a leaky boat and well overdue for patching up.

I bet you haven’t heard anyone talk about a flat tax and an Unconditional Basic Income in the same breath. Does that make me left or right wing? I sure as hell don’t know – or care.

Plugging the gaps in our tax system

Where our tax regime leaks like a sieve is the way it taxes the income earned from investments. And I don’t just mean cash income, I mean all the income (including services) that investors get from their investments. Sometimes income is taxed fully (e.g.; in a bank deposit), other times its not taxed at all (e.g.; an owner occupied house or a business or farm that never makes a profit but serves handsomely as a tax shelter). This is why we advocate a Comprehensive Capital Tax (CCT) to ensure that all income derived from capital is taxed, not just some of it. A CCT is not a capital gains tax, in fact I’m against capital gains taxes because they are complicated and create all the wrong incentives. The complications around capital gains tax get even worse when you exclude the family home as Labour and the Greens suggested at the last election. As John Key said – and the electorate agreed with him – such a capital gains tax is a joke.

With those two reforms to our tax and benefit system I propose, we can protect people’s incomes and jobs in a way that also increases the choices they have, and underwrites a quality of life that all New Zealanders should be entitled to.


Labour and the Green Party are not the only ones who care about poverty was last modified: December 15th, 2015 by Gareth Morgan
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Gareth Morgan