Keeping the basic income debate on track

Not a lot of the debate this week about a basic income policy has been well-informed. Indeed, some of it is pretty low level.

Quote from Prime Minister John Key in the New Zealand Herald on March 24: “Last year I think we collected about $29 billion in taxes anyway, so you would literally have to ramp up taxes enormously … what you would be doing is paying huge amounts of money to those who actually don’t need it, and give less money to the people who really do. I just think as a system it is barking mad.” 

Well, Mr Key, the number is actually closer to $80 billion or 30-35% of GDP, pretty standard for a developed country. As for “not needing it” – as a defender of the most generous of all benefits, the universal largesse of NZ Super you’re hardly allergic to benefits that are not needed.

Anyway, rather than get distracted by the prime minister’s loose and politically driven response, perhaps a few basic facts about the current tax and welfare system seem might keep the discussion sane.

1. About $40b is collected in income tax every year from companies, investors and employees. Any international comparison of the tax burden here against other developed countries will demonstrate there is nothing sacrosanct about that amount. Of course, it very much depends on what is done with the tax collected that determines whether it’s a value-add or not. Cost accounting only gets you so far as Sir Rob Muldoon found out.

More importantly, the current tax policies overseen by Mr Key’s government are intended to collect a lot more tax than they do – unfortunately, they’re designed and implemented badly . Not everybody who has a stake in this economy and enjoys what it provides is paying into the tax pool. Some  large overseas companies are obvious tax shirkers, to give just one example. Just delivering on the intention implicit in the government’s own income tax policies would boost revenue substantially – by at least 20%, presumably something Mr Key would like to see unless he’s a champion of institutionalising tax dodges.

2. New Zealand already has a universal basic income for 686,000 people and it is regarded around the world as an overly generous income support policy. It’s cheap to administer, no one falls through the cracks and it does not discourage individual effort. It’s known as New Zealand Super and it pays each individual on average nearly $18,000 a year after tax – that’s $346 a week, the highest benefit on the books. Superannuitants are free to add to that by working, by collecting interest, by collecting rent without their $18k being at risk – and they never need step foot in WiNZ. No surprise that we have one of the healthiest, happiest elderly populations in the world.

3. Already around working 230,000 families, not customers of WiNZ, get substantial tax-funded welfare payments that are close to a universal basic income in concept. Given the majority of these are couples with kids, that’s at least 300,000-plus working adults already supported by something close to a UBI. The average payment per family is  $6700 a year after tax ($80 per week per parent for a two-parent family).

The recipients of these Working for Families payments face relatively few conditions – they have to work the minimum number of hours and not earn much. There is no asset test, no "good character" requirement, no need to attend intensive "work ready" or "better budgeting" programmes. The problems with the policy are numerous: the payment is low, the conditions attached to the policy trap people in poverty (as they begin to earn more, they have to hand Working for Families payments back) and administering the policy is a significant drain on IRD resources. A basic income policy is free of these problems and significantly lightens the administration load.

4. More than 300,000 adults receive a benefit from WiNZ. This payment comes with a host of demoralising conditions and an incredibly expensive administrative regime.

"Set and forget" is no more acceptable in economic policy than it is in business. It is important to constantly review and adapt policies as need be. And this is particularly true of tax and welfare policy. Consecutive governments have always intended to collect tax in a fair way but policies have become increasingly ineffective. More than 1.2 million adult New Zealanders – one-third of the adult population – currently receive income support through a myriad of complex welfare policies with uneven conditions and payment levels.

Surely the responsible thing to do is to carefully and continually review these policies in an informed way. We all know that Working for Families is a reminder that the market now cannot provide sufficient income for all. It has already recognised that the working poor in the paid workforce are a significant number of New Zealanders.

Co-authored by Susan Guthrie.

Gareth Morgan is a New Zealand economist and commentator who in previous lives has been an investment manager. This post first appeared on Gareth's World.

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