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The Parental Tax Credit and the Welfare State

The Parental Tax Credit and the Future of the Welfare State

By Keith Rankin.

The Scoop introduces a new regular column from Keith Rankin, that will appear every Thursday

Keith is an Auckland-based political economist and social commentator. He teaches political economy, economics, public policy and statistics at Unitec Institute of Technology and Massey University (Albany campus).

His work can be found at

Perhaps the major policy announcement in the May budget was the Parental Tax Credit (PTC), scheduled to take effect in October. Nicknamed the "baby bonus", it represents a plan to extend the Family Support scheme. The PTC, set at $150 per week, is payable for the 8 weeks following the birth of a child.

The PTC is part of the new "Family Plus" programme; an outgrowth of Family Support. It is targeted at households in which an "independent" but low-waged father in fulltime employment is the main provider. It is not payable to "beneficiary" households.

The PTC was presented to the New Zealand public as an alternative to the Paid Parental Leave Bill (sponsored by the Alliance's Laila Harre) that had been gaining traction in Parliament. Indeed, it was intended by the Government to serve as an excuse to bury Ms Harre's bill.

In fact, parental tax credits and paid parental leave are complements, not substitutes. The PTC, which does serve a useful social purpose, gives added reason to introduce paid maternal leave. On its own, the PTC advantages households with male providers.

The PTC is best understood in the context of the evolution of the welfare state into a welfare society. Paid parental leave, an employment cost like annual leave and statutory holidays, also belongs in any balanced welfare society.

The story of social welfare policy in New Zealand since the mid-1980s has been, not only to target benefits (meaning more means-testing and tighter entitlement conditions), but to target wider ranges of people with an increasing variety of benefits, tax credits and tax cuts.

From the point of view of benefit targeting, there are four household types in society. ("Household" here is shorthand for adult singles or couples, with or without children.)

The first group are financially independent households. For present purposes, we will say that these are households that are reasonably assured of an income of over $38,000 per annum. This group does in fact receive benefits, in the form of tax concessions. For individuals grossing over $38,000, the 1998 "tax cut" was equivalent to a benefit increase of $1,200 per annum.

With the introduction of income tax in the 1890s, this group of households became our first benefit recipients. With the emergence of tax allowances in recognition of wives and children, the use of tax concessions as benefits to independent families came to be taken for granted, especially in the middle years of the twentieth century.

The second household group is financially dependent households. We call them beneficiaries, meaning that their main source of income is one of the primary benefits that evolved in the 100 years from 1898 to 1998: Community Wage, Domestic Purposes Benefit, Invalids Benefit or New Zealand Superannuation. Policymakers in New Zealand tend to think of these benefits as long term alternatives to wages and salaries, and not as short-term bridging payments. Beneficiaries are treated as a distinct sub-category of the resident population.

A third group of benefits emerged in the 1980s as a response to both the inadequacy of universal family benefits in the face of inflation and the emergence of working class households whose regular incomes could not support their families. This "Family Support" was followed, in the 1990s, by similarly targeted Accommodation Supplements.

Family Support has now fully evolved into Family Plus, which includes Guaranteed Minimum Family Income (GMFI), Independent Family Tax Credits (IFTC) and the new Parental Tax Credit. Family Support and Accommodation Supplements are now only payable to "non-beneficiary" households.

(Benefits such as the Community Wage include add-ons that are still called Family Support and Accommodation Supplements, but they are treated by WINZ as completely different benefits from those paid to working families. Persons coming off a benefit have to reapply if they wish to receive Family Support and Accommodation Supplements)

The fourth group of households rely substantially on casual incomes: part-time, irregular and self employment. (Many farming families - once regarded as the backbone of the New Zealand economy - fall into this category.) This is the group that still "falls through the cracks", who are difficult to target. Fourth group households, receiving low non-regular private incomes (and who don't know when or even if they will be paid) are an increasing proportion of all households. Qualifying for different benefit entitlements from one week to the next, they cause immense headaches for agencies such as Work and Income New Zealand.

The welfare system has evolved from an emphasis on tax concessions, to an emphasis on providing for dependent households, to topping up the wages of low waged households with regular incomes. The next stage in this evolutionary path is the development of programmes that target the fourth group. The Family Plus package, which targets third group families, reaches into the fourth group. It will have the effect of discouraging fourth group families from applying for primary benefits.

Once all adults receive targeted benefits, then targeting itself becomes nonsensical. The logical next step is to reduce administration costs and "customer" frustration by introducing a universal adult benefit.

The tax-benefit system is evolving into a simple universal form with three components: a universal adult benefit (a "social dividend") of around $125 per week at 1999 prices; a flat rate of income tax in the 33%-39% range; and a means-tested tax credit modelled off Family Support. Such tax credits would probably abate by about $25 for each $100 of a person's private income.

The Parental Tax Credit fills one small crack in the present benefit-targeting regime. Each crack filled represents a step in the evolution of the welfare society. Further, given that a gender-neutral non-exploitative labour market is integral to any welfare society, paid parental leave will emerge as a separate step that complements tax-benefit reform.

Copyright Keith Rankin

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