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The "Working for Families" package of the 2004 Budget aims to lift working families with children out of the relative poverty they had become trapped into. It will do this, by 2007.

In the process, however, as National Party researchers have belatedly noticed (National accuses Government of communism by stealth, Herald 11 June), it creates a new trap. It's a kind of 'income treadmill' which will most affect single-income middle-income families. The Herald (Budget statistics set to be an election battleground 11 June) goes so far as to suggest that this "communism by stealth" will become the issue of the 2005 election campaign.

Targeted families receiving between $38,000 and $60,000 per year will face effective marginal tax rates of 89.2%, meaning that, if the sole-income-earner's income increases by $100 per week, s/he only gets to keep $10.80 of that $100.

This may not be a bad thing. While it will not be a reason to say "no" to a pay increase, neither will it be a reason to work longer hours. To the contrary the income treadmill will be a reason for family 'breadwinners' to negotiate fewer working hours, in return for more time with their children.

If we think of a traditional single-income nuclear family, then it is Dad who is the breadwinner. The message is that, if the family needs more income, then it is Mum's turn to win some bread. If she takes on a part-time job that will bring in up to $190 per week, the family will get to keep nearly three times as much (ie $28.80 per $100 compared to $10.80 per $100) as if Dad earns the extras.

A slightly more subversive message is that the older children could contribute to the household budget. In the first half of the 20th century, a teenager's earnings would be treated as a part of the family's earnings. If our single-income middle-income family was to revert back to 1930s' type, then the $100 per week that the son or daughter earns at the supermarket would contribute a full $83.80 to the family budget.

The process of targeting families through benefits abated on parental incomes also creates a ready supply of home-stay parents for international students. When a home-stay student pays $180 per week for board, the family gets to keep it all.

The National Party research actually understates the income treadmill problem. There are at least four possible aggravating factors.

By adding $10.80 to the weekly family budget, Dad may cost his family the right to the subsidised doctor's visits and prescriptions that a Community Services Card allows.

If Dad has a student loan, the family will get to keep just 80 cents per $100 of extra paternal income.

If one of Dad's children is a tertiary student, the student's allowance will fall by $25 for every extra $100 that Dad earns, much more than the $10.80 (or 80 cents if he is paying off a student loan) that Dad will receive.

A significant minority of parents pay "Child Support" either to former partners or to the state. Child Support is levied at between $18 and $30 dollars per $100 of extra income. Thus a Dad with a second family will, in many cases, become worse off if he increases his earnings.

Effective marginal tax rates in excess of 100 cents in the dollar are not necessarily a bad thing. For example, if men who are Dads to two families receive the clear message that they should work fewer hours, both groups of children (ie children of both past and present partners) will be able to spend more time with their fathers.

Do we need a solution to the income treadmill, given that Steve Maharey's package may prove to be an excellent (if unintended) cure for workaholism?

Whether we need solutions or not, it is important to note that there are solutions. National will not be able to make "communism by stealth" an election issue unless they can enunciate a clear alternative. That will require a new philosophy. National's problem is that the Working for Families package does no more than boost payments that were introduced in the 1990s as core National Party social policy.

One obvious and not very radical policy that National could adopt is to augment the increased Child Tax Credits and Accommodation Supplements with parental income-splitting.

Income splitting would mean that single-income families pay the same tax that two-income families pay, for any given family income. Under income-splitting, no breadwinner will face effective marginal tax rates of 89.2 percent. Affected parents would instead face effective marginal tax rates of 77.2 percent, meaning they would get to keep $22.80 per additional $100 of parental earnings.

Yes, there are real problems with Labour's "Working for Families" package. National, unlike other critics of the package, has at least done the maths. We look forward to National's alternative package.

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Keith Rankin teaches Economics and Statistics at Unitec. He is co-author (with the University of Auckland's Susan St John) of "Quantifying the Welfare Mess" (1998) and "Entrenching the Welfare Mess" (2002). The next sequel has the working title "Escaping the Welfare Mess".

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