So how about that Poverty Action Plan?

Like the intent, not sure about the execution

So FYI this article is more for my New Zealand readers, but read on if you are interested. Recently in NZ there has been a lot of debate around tax policy following the release of the Greens' Poverty Action Plan. The Greens' policy would implement the following:

  • A guaranteed minimum income (GMI) of $325 a week with annual increases for students and people out of work no matter what.

  • Additional support for families with $110 per week for sole parents, $100 a week for children under 3 plus other support.

  • Reform ACC to be more needs based rather than investigating the condition with guaranteed payments at 80% of the minimum wage.

They would achieve this by raising taxes as follows:

  • A 1% tax on net assets (ex mortgage) over $1 million and a 2% tax on assets over $2 million.

  • A 37% tax on income over $100,000 and 42% tax on income over $150,000.

The Greens expect to raise about $8b in the first year of these reforms. The intent of the policy seems fine. What would be happening, on average, is funds would be transferred from those with net assets over $1 million to families and people without jobs. However, the execution needs refinement.

The devil is in the detail

The GMI is poorly targeted. The policy wording states the GMI is for every adult not in full time work. A GMI for all those out of work ignores the existence of wealth the Greens seem intent on addressing. If someone has over $1 million of assets and no job, would the Greens support a GMI for this person? What about the spouse of someone who is earning $200k+? As a rule of thumb needs-based welfare makes sense.

If we focus on students, many of them could be living with their parents and receiving free or subsidised accommodation. Why do they need the GMI? There is also something to be said about excess entitlements. Fees free study plus a GMI for three years duration is remarkably generous. Overall we would be talking about close to $100k financial support over three years for a standard bachelor's degree. The age is also important to consider - students with the latest knowledge, about to enter the workforce, are in a different situation to someone in their late 50s with no job. They have their whole career ahead of them.

The automatic annual increase is also worth talking about. I am very wary of any entitlements that grow automatically because of how quickly growth figures can be out of date. Factors impacting living costs (eg rent and prices) change all the time. Not to mention that it shouldn't be taken for granted that we will always be in an inflationary environment where the cost of living increases. Check out Japan if you want an example. Deflation is real. If the entitlement is to change it should be on a controlled and assessed basis.

Overall the GMI policy would be better targeted by considering need with assessed increases pegged to the cost of living. That being said, with those changes it wouldn't be too different from existing welfare which is already needs-based.

The Greens talk about NZ's welfare system as a poverty trap and how the Poverty Action Plan will address this. They cite low benefit rates as being the cause. Welfare payments in isolation do little to address a poverty trap. There also needs to be educational interventions to develop skills, reductions in the price of necessities and budgeting support among other help. It is truly a multi-factorial problem. In principle, I don't disagree with the notion of raising benefit rates to support standard of living - but it won't address the poverty trap. If anything the policy reinforces a welfare trap (distinguished from a poverty trap by the reliance on social insurance) in that there is less incentive to work if you are on minimum wage. A universal basic income by contrast maintains the incentive to work as the income is on top of what you already earn.

The wealth tax policy seems poorly thought out to the extent that it doesn't address the elephant in the room - NZ's love affair with property. A tax on all wealth does nothing to reduce the difference between tax rates on assets which creates market distortion. It just shifts tax up a notch. So the incentive to over-invest in residential property remains. Furthermore, the Greens' plan taxes all wealth regardless of whether it is being used productively to employ people, or whether it is sitting idle. The tax on wealth would be particularly hard on elderly with illiquid assets, this issue is compounded by low deposit rates. While it is a nice idea to redistribute, practically speaking we need to think about what different types of wealth are achieving.

The actual design of this wealth tax needs tweaking as well as it has no gradient. The policy document states that "no one whose individual net wealth is less than $1 million would pay this tax". So if I have $1 million in net wealth then it sounds like I am paying $10,000 in tax, but $0 if I have just $1 under that. Super weird. Not to mention the $1 million wealth threshold seems a bit arbitrary but I guess they have to draw the line somewhere.

Hostile communication

The Greens state that "We tax work but we don't tax wealth. Those who have large amounts of wealth are not asked to contribute to help everyone else". While we don't tax wealth specifically, everyone is taxed and everyone contributes. Claiming people don't contribute is not going to win allies. The wealth people earn is already taxed on the way to the bank. The income from that wealth is also taxed at the marginal rate. If the Greens have an issue with the distribution of tax that is a different question. People earning over $100k represent 9% of the population and pay 42% of the tax. It is correct that those who can afford to should pay more tax, but completely wrong to say that they don't contribute.

The Greens could communicate better by arguing for an increase in this ratio rather than claiming that the wealthy "are not asked to contribute to help everyone else".

The Greens' Poverty Action Plan seeks to redistribute towards families and those who have less. I broadly agree with this goal but the challenge is one of execution. Perhaps this is harsh, the details may be worked out in time, but policy options must be held to a very high standard before implementation. Frankly, I can't work out why they aren't proposing a specific tax on property of some sort - that would make more sense in the NZ context. If the Greens can target the wealth tax more towards property and ensure the GMI is appropriately targeted based on need, the Poverty Action Plan could be more effective.

▼▼ Thank you for reading. Please share using the links below. ▼▼

Subscribe for updates

© Byte Size Story 2020

A New Zealand based politics and economics blog

  • Twitter