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

3. 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. 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. 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. 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. 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. 8 Selected results

9. 9

10. 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. 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. 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. 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. 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. 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. 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