Opportunity’s ‘tax reset’ could benefit many households – but does little for the poorest

Michael
Fletcher, Te
Herenga Waka — Victoria University of
Wellington

With the Opportunity Party
on the cusp of the 5% threshold to make it into parliament
after the November 7 election, its signature “tax
reset” proposal deserves close attention.

The policy is essentially a universal basic income
(or “citizen’s income”), with a range of supplementary
payments replacing current welfare benefits and NZ Super,
funded by a land tax.

Opportunity presents its
reset as a solution to New Zealand’s welfare problems. But
is it really?

Most universal basic income (UBI)
proposals fall down on two major design problems. They fail
to provide enough income for all but the simplest household
types. And they typically require implausibly high income
tax rates to pay it.

Opportunity’s policy aims
to get around the first problem by including additional
payments on top of the UBI.

As well as an annual
tax-free income of NZ$19,400 there would be add-ons for
disability ($6,000), housing (average $6,500 for singles,
$10,500 families), sole parents ($9,500), over-65s ($10,000
for singles, $5,250 for a couple) and children ($6,750 to
$18,250 each, depending on age).

The package would
replace all existing main benefits, NZ Super, the
accommodation supplement, Working for Families tax credits,
Best Start and paid parental leave.

The proposal
gets around the second problem of higher income taxes by
funding the UBI and add-ons with a tax on the unimproved
value of land: 1.75% annually on urban land, and 0.5% on
rural land.

This means only relatively minor
tweaks to the income tax schedule would be needed. The top
marginal tax rate of 39% would stay.

But there are
drawbacks to both these solutions.

Little help
for the poorest

Although Opportunity downplays it,
much of the existing welfare apparatus would still be
necessary.

True, there would be no work testing.
But a range of other eligibility tests would continue:
health status for the disability supplement; relationship
status for the sole-parent add-on; cost verification for the
housing allowance; and shared-care rules for the child
allowances.

Moreover, all these add-ons are
targeted, so would require income testing. Individually, the
supplements may be justified. But collectively they raise an
obvious question: if all this is needed, why bother with the
UBI?

A second and more serious problem is that the
proposal helps the worst off the least, namely beneficiaries
on below-poverty-level incomes. To propose such a major
change to the tax/benefit system and yet do so little to
address welfare poverty suggests a blind spot around the
biggest problems facing the current system.

This is
highlighted in the graph below which compares
Opportunity’s proposals with current policy for two family
types: a single person alone, and a sole parent with one
young (two-year-old) child.

The horizontal axis shows different levels of
earnings from nil to $200,000. The vertical axis shows the
household’s in-the-hand income after taking account of
income taxes, benefits, the citizen’s income and add-ons.

For simplicity, the current accommodation
supplement and Opportunity’s housing add-on are excluded.
While the absolute values are different, the broad picture
is the same for other household types.

For all
annual gross incomes above about $20,000, both households
are clearly better off under Opportunity’s proposal
(before considering the land value tax).

The exact
amount varies depending on income. But for earnings over
about $30,000, these single-adult households would typically
gain $11,000 or more – enough for a homeowner to pay land
value tax on land worth up to around $650,000. The amount is
considerably higher for couples because each person receives
the citizen’s income.

However, gains from
Opportunity’s plan are much smaller (and in some cases
negative) for people with little or no market income –
that is, all beneficiaries and many superannuitants. A
single adult with no income gains just $27 a year – 52
cents a week.

If they supplemented their
citizen’s income with a few hours’ work, they would
actually be worse off than under current rules.

The situation is slightly better for the sole
parent household in this example. If they had no other
income, they would be $2,869 better off under the tax reset
(less if they work a few hours on top of the
UBI).

Again assuming no effect from the land value
tax, a person on a disability benefit with no other income
is between $3,324 better off and $984 worse off, depending
on how much disability allowance they currently receive. A
single superannuitant with no other income gains just $532 a
year.

These effects seem intentional. Rather than
prioritising poverty reduction, Opportunity’s citizen
income package has been designed to more or less match
current welfare payments, with the bigger gains higher up
the income distribution.

Problems with a land
value tax

The land value tax does have some
positives. Land taxes are economically efficient and
relatively hard to avoid, and a land value tax would be an
incentive for more intensive land use.

Arguably,
reducing New Zealand’s heavy reliance on income taxes and
GST by switching some revenue gathering from income to
wealth could also be seen as an advantage.

But
there would be some serious losers.

Introducing
the tax would almost certainly be associated with a large
fall in land values. A significant number of homeowners
could suddenly face the risk of negative equity.

Paying a tax bill that would likely be more than
$10,000 annually on an average home would be near impossible
for many superannuitants, beneficiaries and others.

There are ways to mitigate some of these problems.
But even leaving the politics of taxation aside,
implementing a new land tax would be
fraught.

Perhaps the fundamental problem with
Opportunity’s proposal is that it attempts to construct a
UBI-based welfare system broadly within the current level of
total tax revenue.

The result is a structure that
does little for those at the bottom of the income
distribution and yet retains many of the current targeting
complexities.

An alternative UBI package could
produce better outcomes for those relying on benefits. But
that would require higher total tax revenue, making its
political feasibility even less likely.

Michael
Fletcher, Adjunct Research Fellow, School of Government,
Te
Herenga Waka — Victoria University of
Wellington

This article is
republished from The
Conversation under a Creative Commons license. Read the
original
article.