Please Jacinda, don’t take the Blackadder approach to tax reform

Jacinda Ardern has outsourced Labour’s decision on a capital gains tax to a working group. But why? It’s time we stopped treating tax working groups as the magical solution to problems in the tax system, writes Jess Berentson-Shaw.

Melchett: Field Marshal Haig has formulated a brilliant new tactical plan.

Blackadder: Ah. Would this brilliant plan involve us climbing out of our trenches and walking very slowly towards the enemy?

Captain Darling: How could you possibly know that, Blackadder?

Blackadder: It’s the same plan that we used last time and the seventeen times before that.

Melchett: Exactly! And that is what is so brilliant about it! There is, however, one small problem.

Blackadder: That everyone always gets slaughtered in the first ten seconds?

New Labour party leader Jacinda Ardern has indicated that she will put together (another) tax working group if she becomes prime minster. Arden pointed out on Radio New Zealand what many tax specialists, including Deborah Russell and Terry Baucher in their recent book Tax and Fairness (read it I dare you), have noted – that the New Zealand tax system is inherently unfair. It is unfair because the burden of tax falls primarily on income earners. The imbalance occurs mainly because we don’t have a true wealth tax and property investments are not taxed in the same way as income particularly – though there are other tax issues that experts can talk about for hours.

Ardern has also made clear that two of her priorities in government would be children living on low incomes, and the issue of inequality. And that’s why I make a plea not to do things the same way they have been done every other time people in government have looked at tax.

There are two recurring problems: 1) that such groups do not explicitly examine how tax policy interacts with welfare policy, and 2) they do not include and empower those with diverse experiences in the process. This time lets not take Field Marshal Haig ‘s approach to tax policy reform because doing the same thing in the same way will get the same outcome.

Source: blackadderquotes.com

Policy gone pear-shaped

The tax system is unfair in New Zealand, and the burden falls disproportionately those who are at the sharp end of low incomes. This is because welfare policy, Working for Families and tax policy work together to create a nightmare for people on low incomes. What looks good in theory, in graphs and models, has turned into a huge burden for those living on low incomes wanting to work their way out, especially for those with children.

For people on good incomes with simple lives (no student loan, no children etc.), tax policy mainly affects them through income tax thresholds, as earnings go up, each additional dollar they earn over the threshold will be taxed at a higher rate (so they see less of that dollar earned in the hand than previous dollars earned). For people living on low incomes who work sometimes, need welfare support at other times and who also have children, the whole picture of their earnings after tax and welfare interactions have played out is pretty bloody scary.

Associate Professor Susan St John is an economist who has been talking about this stuff for just about her entire career. She spends time both researching the issues and listening to low income families – families who have brutal and distressing stories to tell about how tax and welfare policies work together to push them further into poverty.

At a recent meeting Prof St John told a story of a working family in Auckland she knew who were on the edge of homelessness due to the way tax and welfare policies played out. I would encourage you to read their story in full, including how they ended up facing eviction because Maria, the mother, moved from part time to full time work. The intergenerational impacts of these polices are huge, as children like Maria and Sam’s are put at risk from policy gone pear-shaped.

There are so many of these stories told by families trying to live on low incomes, if we are prepared to listen to them. We need to consider, at the highest levels, the uncomfortable reality of people’s lives, and how policies made by those who never have to live these lives, are failing people.

Prof. St John carried out a comprehensive critique of the last tax working group, highlighting that the distortions of the tax/welfare interface were not even in the mandate of that group (seriously?). She pointed out then that

“While a family on an income over $48,000 might face an effective marginal tax rate of 51 to 58%  due to Working for Families, more serious problems are faced by those on benefits whose effective marginal tax rates may exceed 90%.”

What is an effective marginal tax rate?

It is one of those terms economists and tax experts happily throw around, missing the fact that a large part of their audience have no idea what they’re talking about. Here is the simplest explanation I can give:

The effective marginal tax rate (EMTR) refers to how much of the income you earn you will receive in the hand once both your personal tax rate and any reductions on your earnings have kicked in. An example of reductions in earnings is the petering off of Working for Family tax credits for each additional dollar earned. The same for welfare payments – once someone earns more than $100 a week their welfare payments are reduced. Other reductions include child care subsidies, which taper off with additional earnings; income-related rent subsides are ‘abated’ for each additional dollar earned; student loan repayments go up as you earn more; loan repayments to WINZ and child support both come off earnings. As the complexity of people’s lives increases, so does the complexity of the EMRT.  And those living on low incomes have very complex lives.

In 2015 it was reported that there are around 4000 people in NZ who actually have a 100% EMRT: for every dollar they earn they lose a dollar through tax and abatements.

And while we discuss this problem in meeting rooms, in rundown homes across New Zealand families are finding the EMRTs are so stressful and difficult to manage that they decide there is simply no real benefit to working. Rational economics just does not work; people will not choose to work to get an extra $40 in the hand if the impact on their quality of life, from managing children, transport, sick days, precarious work, and exhaustion, is unbearable. This is no work incentive.

But do tax experts really understand the lived reality; do they listen to welfare experts? Do they include and listen to people with direct experience of this nasty interface, instead of just considering it in theory?

The importance of diversity in tax working groups (and everywhere in government)

I recently wrote about the problem of unconscious bias in policy making – too many of one type of person who, in viewing the world through a prism of their own experiences, are not able to see they are making recommendations and policies that hurt the people they need to be enabling.

If people in government are going to undertake another review of tax (and hopefully welfare) policy, then for goodness sake let’s make a commitment to increase the diversity at the table. Include those people who know what the interface feels like in reality – don’t just have them making submissions. The real power is often having a seat at the table and being actively listened to.

Let’s not do the same thing we have always done and expect the same outcomes. If we did this then Blackadder would have much to say, and nothing involving the words “cunning” or “plan”.

Review our unfair tax policy, but review it alongside our unfair welfare polices, and ensure that the right people sit round the table of that review. It would show a commitment to improving outcomes for those who are struggling, because people in power have created policy that limits the choices of too many.


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