Wednesday, March 02, 2011

Key commits to WFF cuts

John Key has confirmed he will be attacking Working For Families to help pay for rebuilding Christchurch. However, he says that cuts will only affect "high income earners".

The devil is very much going to be in the details on this. National hates the fact that you can theoretically get Working For Families tax credits if you earn over $100,000 (if you have something like four kids. The problem is that it is very difficult to prevent that without affecting the ordinary families that the scheme is supposed to benefit. WFF tax credits work by summing up the various base amounts (family tax credits, in work or child credits etc) and then abating them at a rate of 20 cents for each dollar over a threshold (which is currently $36,827). This gives the government three variables to play with: the base amount, the abatement rate, and the threshold. Reducing either reduces entitlements at the top end, but with a significantly greater impact on people who really need the money. Such an impact could be avoided (for those below some threshold judged "deserving") by a combination of raising the base income threshold and increasing abatement - but at the cost of creating very high effective marginal tax rates for those in the target zone. Which is one of the things National complains about.

Basically, there's no way to do this which doesn't hurt people who National doesn't want to hurt, either by cutting their income or sticking them in a poverty trap. It can't be done. If National wants to cut the top-end of WFF, then everyone else gets to be collateral damage to their symbolism. That's not good policy. And in an election year, its not good politics either. There will be no shortage of people in Christchurch willing to ask "how does cutting my income / massively increasing my marginal tax rate help me recover from the earthquake". Its a damn good question. And if National doesn't have a damn good answer, they deserve every bit of the electoral backlash they're going to get.

(I'm interested in how much the top-end of WFF costs us anyway; I doubt it is very much. But National hates it on principle as "middle class welfare". of course, the real solution then is to raise wages so that such welfare is unnecessary - but that goes against the entire grain of National's economic policy...)