As we recently reported on TheBFD, the relentless monster known as the welfare state inexorably drags even the highest income-earners into its honeyed trap. While most people think of ‘welfare’ and picture Struggle Street families scraping by on some pension or other, the creeping welfare state now sees even New Zealanders earning 150 grand receiving government benefits.
This is what makes the welfare state such an undefeatable monster: no-one wants to give up ‘free’ money. Once a government introduces a benefit, it’s almost impossible for subsequent governments to claw it back. But while middle-class welfare is bad enough, worse is how the welfare state entraps the very people it is supposed to help – the poor – in a soul-destroying cycle of generational poverty and dependence.
Some New Zealanders are being trapped by a tax and welfare system that means it doesn’t make sense for them to earn more, commentators say.
While they might earn a few extra dollars, in some cases almost three-quarters is taken back before it even hits their bank accounts.
How does it happen? One of the biggest culprits, experts say, is Working for Families.
Like so many of these poisonous welfare schemes, Working for Families was introduced by Labour supposedly to ‘help’ (what was it Reagan said about “the most terrifying words in the English language”?). Instead, like government-issued heroin, it traps people in a wretched cycle of dependence.
Tax commentator Terry Baucher said the way it was structured meant that some people could end up paying an effective tax rate of about 50 per cent on any extra money they earnt.
An “effective marginal tax rate” is different to the tax rate you see going out of your pay each fortnight. It’s not only tax, but also how a rise in wages can mean you miss out on means-tested Government assistance, like Working For Families.
Once your household’s income exceeds $42,700, you lose Working for Families tax credits at a rate of 25 per cent […] with ACC payments, KiwiSaver contributions and student loan repayments, they could end up losing more than 70 per cent of any new earning.
If you work harder to earn a poofteenth more, you lose a bundle more of your government handouts. So, why would anyone bother working harder?
This is an even bigger problem for people who aren’t working at all.
Infometrics chief forecaster Gareth Kiernan said it was most acutely an issue for a household’s primary earner moving from a benefit to paid employment.
Someone on sole parent support who earns more than $200 a week loses 70c in the dollar of benefits.
Just because they’re unemployed, people aren’t stupid. They quickly work out if it’s economically sensible to take up part-time or low-income work when they’ll get more money just sitting on the couch. Yet, part-time, casual or low-income work is often just the first step to better things. But, what hope is there if people – quite sensibly from their perspective – never take that step? Even more than a decade ago, former Australian treasurer Peter Costello recognised that the structure of welfare payments meant that it made little sense for unemployed people to try and transition to paid work.
For all his talk, though, Costello never did anything to fix it. Because it wasn’t worth losing the votes.
“The introduction of Working for Families by the Labour Government last decade […]was also a convenient vote-capturing exercise.
“Unfortunately it didn’t try to address the fundamental problems […] Working for Families has effectively created an additional layer of beneficiaries who are dependent on the government for some of their income and, depending on their circumstances, don’t have an easy way of getting out of that dependency given the incentives of the system. This dependency also makes it very difficult for any incoming government to substantially change or remove the system.”
It’s infuriating for hard-working taxpayers to see people on long-term benefits not even trying to find work, especially while jobs are going begging and employers are importing foreign workers. Yet, from the perspective of people on welfare, it’s only common sense not to get off their arses if they’re only going to be worse off, financially.
Baucher said […] “It’s all well and good to say people on a benefit should go out and work but the impact on them from trying to do that […] it’s very hard for them to break through.”
stuff.co.nz/business/114949505/tax-system-means-for-some-its-not-worth-going-out-to-work