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When Work and Marriage Do Not Pay

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

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When Work and Marriage Do Not Pay

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  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. Structure of presentation • Definitions • Policy context • Selected results • Conclusions

  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. 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. 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. 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. 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. Selected results

  9. Selected results

  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. 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. 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. 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. 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. 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. 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

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