Friday, June 11, 2004

Bring on the dancing Cossacks

National is accusing the government of "Communism by stealth" because its "working for families" package significantly reduces income gaps between families.

They look at two families, both single income, two kids, one on $38,000 and one on $60,000. After accounting for income tax and government transfers, the first family's net income is $42,860. The second family gets $45,236. The difference is only ~$2500! Communism!

Of course, that small difference does not result because the government is penalising the higher income family (or, for tax-haters, it is not "penalising" them any more than they are now); the difference results because, essentially, one family gets assistance, and the other does not. The higher income family is basically paying tax but receiving no direct income support, while the lower income family is effectively getting all its tax back, plus a some extra on top.

In other words, National's core problem with the scheme is that it is so generous. Generous to the extent that some families are getting almost $200 a week extra in the hand from the government.

This generousity may very well cause people to value time spent with their children higher than the marginal returns of working an extra hour, but so what? We work to live; we don't live to work. The fact that we now need effectively two incomes to support a family where we previously needed only one has been a very real (but mostly invisible) impoverishment of New Zealanders, and this will go some way towards correcting it, at least for some people.

But National is right - the incentives set by this scheme will have an effect on the economy. The labour force will shrink, as people with children decide not to work part time or work that extra hour. But this simply means more work for the rest of us. There is still plenty of underemployment in this country - people who would like to work longer hours - and I'm sure the 93,000 people on the dole wouldn't mind filling in a bit here and there. And the fact that they should be able to get higher wages as the labour market tightens is not going to hurt one iota.

Hmmm... more people being able to spend more time doing the things they enjoy rather than working, more opportunities for the unemployed to move into work, and upward pressure on lower-end wages. If this is "communism", then bring on the dancing Cossacks!

Update: Added link to table. That'll teach me not to read the Herald the whole way through before posting.