http://rankinfile.co.nz/rfile040524FamilyTaxRoughanReply.html

John Roughan (If anyone deserves help, it's families on single incomes, NZ Herald 22 May) correctly notes that single earner families are condemned to relative poverty. This is especially true in Auckland, where housing costs have been inflated by a number of factors.

Probably the most important reason why house prices are so unaffordable is the overwhelming dominance of two-earner 80-hour-income households. Such households have budgets which represent the equivalent of two full-time salaries per week, typically $70,000 to $80,000 before tax.

So long as 80 hours of paid work is the Auckland norm for a 2-adult household, then it will cost around 30 hours of paid work to service a typical Auckland mortgage. That is impossible for almost all 40-hour-income families.

John Roughan wants tax cuts to target single-earner families. The problem is that it is technically impossible to do this without either doing the very things Labour plans to do (and which Roughan opposes), or introducing a radical new approach to income tax accounting.

Roughan offers two solutions: income tax splitting, and "simply leaving more money in the wage packets of the lower paid". Each of these solutions, in practice (and like paid maternity leave which Roughan opposes), gives more cash to the relatively affluent.

This is why. We have a 4-step income tax scale. The first $9,500 of annual earnings is taxed at 15% (much higher than the countries we compare ourselves with). The next $28,500 is taxed at 21%. The following $22,000 is taxed at 33%. Remaining income is taxed at 39%.

An obvious policy might be to cut the first tax band, to say 5% tax for the first $10,000 of personal income. That would put nearly $20 per week into the "wage packets" of all single-fulltime-earner families, including those on very high salaries. And it would put $40 extra per week into almost all two-earner families, the very households Roughan (and I) believe should not be assisted.

Income splitting, on its own, would help fulltime (40 hour) single-earner families on the minimum wage ($9 per hour) by just over $10 per week. Combined with the abovementioned reduction of the lower tax rate to 5%, such a family would gain nearly $47 per week.

The same policy mix - a tax cut for the first $10,000 of income combined with the introduction of income splitting - would provide bigger gains for high-income single-earner families (and for many two-earner families) than for the targeted families.

A single-earner family on $38,000 per year (clearly a target family) would gain $51 per week. A single-earner family on $76,000 per year would gain $157 per week. A single-earner family on $120,000 per year would gain $207 per week. A two-earner family, on $55,000 and $21,000, would gain $79 per week ($28 more than the target family) from such a policy.

Michael Cullen's budget will be much better targeted, through increased family tax credits and accommodation supplements, than any mix of Roughan's suggested policies.

John Roughan says "Labour has a philosophical preference for providing help in the form of benefit payments rather than tax reductions in any form". By definition, however, benefits are simply negative taxes, and taxes are negative benefits. Macroeconomists prefer to talk about "net taxes". Increased tax credits address relative poverty more efficiently than conventional tax cuts.

The problem with Labour's likely proposals - and I agree with John Roughan on this point - is that they will make the tax-benefit system even more complex than it is now.

There is a way around this problem, however. The first step of the solution is costless. It is simply to simplify the language with which we describe the income tax scales.

I have noted that we have a four step income tax scale. We can, if we choose, call the 33 percent tax rate the "normal" tax rate. Therefore, relative to that norm, the 15 percent and the 21 percent rates can be called the "concessionary" tax rates. And the 39 percent tax rate on incomes over $60,000 can be called a "tax surcharge".

All persons earning $38,000 or more currently get the full benefit of the concessionary tax rates. The full concession amounts to $5,130 per year, or $99 per week. Persons earning less than $38,000 get less than the full amount. (High earners also get less than the full amount. They face a 39% tax rate, which amounts to a modest but progressive surcharge on incomes over $60,000.)

The first (costless) step is to define the existing tax concession in dollar rather than percentage terms. The second step of my suggested solution (not costless) would be to pay this fixed benefit, in full rather than in part, to all parents.

This approach would fully satisfy John Roughan's criteria for assisting single-earner families. The irony is that the best way to target relative poverty may be to create a universal benefit.
 

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