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The only trade-off that matters

Does society care enough about the poorest children to pay the around $500 million per annum required to significantly reduce child poverty?

Eric Crampton from The New Zealand initiative argues that Working for Families is a mess that can’t be cleaned up but his assertions are made from a perspective that is blinkered and misled.

The first issue to mislead him is that he has been seduced by the name 'Working for Families' into thinking this critical programme is only about working, or more specifically, paid work.  

He is not alone. WFF is forever associated in the public’s mind with the economic concept of work when in fact 80 percent of the $3 billion+ cost has nothing to do with work at all. The other 20 percent constitutes a so-called In Work Tax Credit (ITWC) that may qualify to be the worst designed ‘work incentive’ in the developed world. No self-respecting economist would want to own it.

The IWTC is worth $72.50 per week for a one to three child family and $15 more for each subsequent child. It is a significant part of the overall WFF amount paid to the caregiver to help meet the needs of her children and prevent child poverty. Currently, to qualify, the family must be in some paid work and not be accessing a social welfare benefit or any part of a benefit.  

Sadly, it has two conflicting objectives: the need to make incomes adequate while also being an incentive to work. To perform the last role, it must be withheld from those who are not in paid work. It cannot then perform its income adequacy goal for those families who simply cannot work or cannot work enough hours to be completely off a benefit.

The confusion can be seen here in the description in the consultation for the 2022 WFF review:

             Working for Families tax credits support low-income families to have enough money to live, help to reduce child poverty, and support low-income families to take up work.

Families on benefits can’t respond to the carrot of a work incentive if there are no jobs or they are unwell, disabled or have children to care for. They do not choose to become unbearably poor. One mother who lost her job in the pandemic and now works as a full-time volunteer writes:  

How can it be fair that because I look after my family and volunteer my time, my son misses out on getting the full benefit of 'Working for Families' tax credit? An extra nearly $4000 a year would help me get on my feet. Currently, I am barely treading water financially. If something else happens, like a family member dying, getting Covid, or my washing machine breaking down, I fear I will drown financially.

Treasury’s one serious evaluation, Working for Families changes: The effect on labour supply in New Zealand, just after the IWTC was brought in, showed that sole parents on average did a sliver more hours of paid work per week but married women did fewer hours than before because with the IWTC their families felt they could afford for her to spend more time raising her children. Joining the dots overall, hours of paid work were actually fewer than before. Soon after, we had a recession in which any of the minuscule employment gains for sole parents were reversed.

The IWTC is a most peculiar work incentive. It is paid well up the income scale and is received in full, for example by a caregiver with three children who is not in paid work so long as her partner’s income is less than $86,000. Families with more than three children don’t start to lose it until incomes are well over $120,000. A full-time stay at home parent with five children in a household earning $150,000 still gets the full IWTC of $102 per week for that number of children.

But not so a really impoverished sole parent on a benefit with several children. Even if she is in part-time paid work, her children miss out on this important part of WFF payments.

Eric Crampton correctly identifies the huge marginal tax rate problem for families earning over $48,000.

       High Effective Marginal Tax Rates (EMTRs) as the Family Tax Credit and In Work Tax Credit abate provide disincentives to work. Want to lower them? Well, that has costs. If you keep everything else the same and reduce the clawback rates to, say, 15 cents in the dollar instead of 27 cents, the costs of the scheme will blow out. And the scheme will transfer a lot more money to those on far higher earnings. You reduce the EMTR for some workers by 12 cents. But richer families will start getting payments along with an EMTR that is higher by 15 cents.

So that could be a problem if you care about any of programme cost, targeting of assistance to those in most need, or avoiding higher EMTRs at the top.

We saw the iron law in work in the changes made to WFF in April 2022 when the Government increased the family tax credit by $5 real per child per week to reduce child poverty. But it was expensive as it goes way up the income scale. To claw it back, the rate of abatement was increased from 25 percent to 27 percent while keeping the threshold of family income from which abatement starts at a fixed $42,700. 

Crampton claims there are no 'This improves everything!' solutions to be had. Only trade-offs. But if he looked closely at the IWTC he would see it is a nonsense work incentive. If this payment for children was joined up with the Family Tax Credit, it would be the most cost-effective way to substantially reduce child poverty in the very worst-off families, while not needing any increase in EMTRs as it only goes to those well below the abatement level.   

Genius? But to see this, Crampton would have to rethink this statement:

The point of Working for Families was to make sure that there was a real payoff to being in work. Getting rid of the in-work requirement for the tax credit that is specifically called the “In-Work Tax Credit” undoes that.

He should have said:

The point of Working for Families is to make sure children do not suffer poverty. Having in-work/off-benefit requirements for the “In-Work Tax Credit” undoes that.

Paying the full WFF to all low-income families will significantly reduce child poverty. But does society care enough about the poorest children to pay the around $500 million per annum this requires? That is the only trade-off that matters.