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Table of Contents
1.
The Income Tax and Transfer System
1
2.
Negative Income Tax Systems
15
3.
Modelling a Cost-Neutral Guaranteed Minimum Income (GMI) Scheme
25
4.
The Treasury’s position on income adequacy and poverty: previous advice and
27
potential directions
5.
The Treasury’s position on income adequacy and poverty: previous advice and
44
potential directions - Slide Pack

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The income tax and transfer system: issues and
options

This note is intended to be an internal resource for officials to support the analysis of tax and
transfer settings. It is not government policy or advice.
The scope of this report is the personal income tax system and the transfer payments (benefits,
supplementary assistance and tax credits) received by working-age individuals and families. This
report discusses the broad structure of the tax and transfer interface and does not evaluate each
individual transfer payment. Retirement income policy is not within scope.
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2.
3.  The nature of work is changing, which poses challenges for the tax and transfer system.
There is greater diversity of working arrangements than in the past and there may be
greater use of the social safety net in the future to support workers as they transition
between occupations. Some argue that a universal basic income (UBI) should be introduced
to reduce job insecurity in this environment.  However, there is not a strong case for a UBI in
New Zealand as it would reduce the effectiveness of the welfare system in reducing poverty,
although overseas pilot studies should be monitored for their outcomes.
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5.

6.

7.
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Cash transfers are one component of overall social spending. New Zealand’s social spending is
approximately equally split between cash transfers and social services (around 10% of GDP is spent
on each). For the working-age population, two-thirds of social spending is through in-kind support
and one-third is in cash transfers.

2

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FIGURE 1 - SPENDING ON CASH BENEFITS AND SOCIAL SERVICES
OECD
New Zealand
New Zealand
OECD

Source: OECD
FIGURE 2 - PUBLIC SOCIAL SPENDING ON THE WORKING-AGE POPULATION

Source: OECD
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3

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4

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y

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There are two fundamental types of structures for income transfers: 1) a universal basic income or
2) means-tested benefits. Both can achieve a poverty alleviation goal and create a progressive
effective tax rate structure. However, there will be different properties in terms of average and
marginal tax rates. Related to this is the concept of target efficiency. A universal basic income is
simple but is also received by the whole population, which means that some receive a transfer that
is not necessary to alleviate poverty. It is typically associated with a high average tax rate to fund the
universal transfer payment. Means-tested benefits generally have greater target efficiency but are
associated with potentially higher effective marginal tax rates for recipients as benefits are abated.
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FIGURE 21 – SOCIAL EXPENDITURE BY AGE OF CHILD IN NEW ZEALAND
$ (PPP per capital USD)
Cash benefits
Childcare
Other benefits in kind
Education
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
atal
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
en
Pr
Age of child

Source: OECD. Note: Data is for 2011, but pattern would be expected to be similar in 2017.
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Part 2: Options

The options that are considered will depend on objectives. We discuss the general issues relating to
addressing barriers to employment and income adequacy.
Options to addressing barriers to employment
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A universal basic income avoids the question of varying incomes from wages or salaries, since - by
definition – this kind of payment is not conditional on earned income. In a highly targeted transfer
system, however, state income support is withdrawn as income from wages and salaries increases.
This can have the perverse impact of discouraging people from taking up more employment. Income
taxes combine with abatement of transfers create high effective marginal tax rates.
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Universal basic income
A universal basic income (UBI) is a type of tax and transfer policy that provides a guaranteed
minimum income to all households, irrespective of income, work-status or other criteria.
It is an old idea, but has received renewed attention. Its key advantage is its simplicity. Economic
changes mean that workers may have greater job insecurity, technological disruption and different
types of working arrangements (eg, the ‘gig economy’) than in the past. A UBI may support greater
income security in this type of economic conditions.
The disadvantages of a UBI is that it will likely increase poverty rates, in the absence of large
increases in tax revenues. Spreading existing working age benefits to the entire working age
population will materially reduce the level of payment to those who already receive benefits. At
current spending levels, a UBI would be substantially below the poverty line in most OECD
economies (OECD, 2017). This is particularly the case for New Zealand, given New Zealand’s existing
transfer payments are highly targeted. To illustrate, New Zealand spends around 10% of GDP on
working age benefits, which is around $8,500 a year per working age person. A sole parent jobseeker
currently receives around $17,000 a year.
While concerns around impact on poverty rates could be addressed with a higher payment rate, this
could not be budget neutral.  It would require a significant increase in tax revenues, and therefore
average tax rates would rise. This could materially weaken work incentives and reduce employment
levels.
There are a number of pilot studies planned for UBIs in certain municipalities, including in Canada,
the Netherlands and Finland. It is too early to evaluate the effects of these pilot studies, but they
should be monitored for their results.
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The nature of work is changing, which poses challenges for the tax and transfer system. There is
greater diversity of working arrangements than in the past and there may be greater use of the
social safety net in the future to support workers as they transition between occupations. Some
argue that a universal basic income (UBI) should be introduced to reduce job insecurity in this
environment. However, there is not a strong case for a UBI in New Zealand as it would reduce the
effectiveness of the welfare system in reducing poverty, although overseas pilot studies should be
monitored for their outcomes.
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References
Kleven, Henrik Jacobsen. 2014. "How Can Scandinavians Tax So Much?" Journal of Economic
Perspectives, 28(4): 77-98.
OECD (2011), Taxation and Employment, OECD Publishing, Paris.
http://dx.doi.org/10.1787/9789264120808-en
John Creedy and Penny Mok (2015) “Labour Supply in New Zealand and the 2010 Tax and Transfer
Changes”. Treasury Working Paper 15/13.
John Creedy & Penny Mok, 2017. "The Marginal Welfare Cost of Personal Income Taxation in New
Zealand," Treasury Working Paper Series 17/01, New Zealand Treasury.
Penny Mok and Joseph Mercante (2014) “Working for Families changes: The effect on labour supply
in New Zealand” New Zealand Treasury Working Paper 14/18.
John Creedy, 2010. "Tax-and-Transfer Tensions: Designing Direct Tax Structures," Australian
Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social
Research, vol. 43(2), pages 103-113.
Carey, D. (2017), "Adapting to the changing labour market in New Zealand", OECD Economics
Department Working Papers, No. 1420, OECD Publishing, Paris.
http://dx.doi.org/10.1787/e6ced642-en
Veronica Jacobsen, Nicholas Mays, Ron Crawford, Barbara Annesley, Paul Christoffel, Grant Johnston
and Sid Durbin (2002) "Investing in Well-being: An Analytical Framework" New Zealand Treasury
Working Paper 02/23 December, 2002.
IMF, Fiscal Monitor, October 2017
OECD 2012, “Income inequality and growth: The role of taxes and transfers”, OECD Economics
Department Policy Notes, No. 9. January 2012.
OECD (2016), “Enhancing Child Well-Being to Promote Inclusive Growth”
http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DELSA/ELSA(2016)7/REV
1&doclanguage=en
Layard, R., A. Clark, F. Cornaglia, N. Powdthavee and J. Vernoit (2014), “What predicts a successful
life? A life-course model of well-being”, The Economic Journal, Vol. 124, Issue 580, pp. F720-F738.

Emmanuel Saez (2002) “Optimal income transfer programs: intensive versus extensive labor supply
responses” The Quarterly Journal of Economics, August 2002.
Robert W. R. Price & Thai-Thanh Dang & Jarmila Botev, 2015. "Adjusting fiscal balances for the
business cycle: New tax and expenditure elasticity estimates for OECD countries," OECD Economics
Department Working Papers 1275, OECD Publishing.
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Blanchard, Olivier, Dell'ariccia, Giovanni and Mauro, Paolo, (2010), Rethinking Macroeconomic
Policy, Journal of Money, Credit and Banking, 42, issue s1, p. 199-215.
Jonathan Boston & Simon Chapple (2014) Child poverty in New Zealand.
Jason Raven (2015) "Financial Incentives to Work" Policy Quarterly – Volume 11, Issue 4 – November
2015

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IN-CONFIDENCE

Summary of modelling capabilities in terms of potential
options

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Universal
Basic Income
(UBI)
Potential
HES
data sources
Taxwell
Such a

significant
change to the
system means
that any
results based
on a static
analysis may
be too
removed from
the actual
impacts.
Taxwell B
No


27
http://www.stats.govt.nz/browse_for_stats/people_and_communities/Children/ChildcareSurv
ey_HOTP2009revised/Commentary.aspx

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MSD – MSIM Only for MSD
clients
IR
No –
insufficient
data as does
not include
people with
no income

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Draft 1
NEGATIVE INCOME TAX SYSTEMS

Ewen McCann1
6 September 2000

Prepared for a Working Group on Financial Incentives to Work

1 I have had useful conversations with Martin Neylan while preparing this paper.
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Summary

1.
The negative income tax system of delivering welfare benefits consists
of,

•  A lump sum transfer payment clear of tax.
•  A tax on market income.

2.
Al  welfare delivery systems are compromises between the conflicting
objectives of,

•  Decent living standards.
•  Low levels of break-even income.
•  Low rates of the abatement-tax

3.
A negative income tax with wide coverage would,

•  Be administratively cheap and transparent to beneficiaries.
•  Preserve horizontal equity.
•  Offer similar work incentives for al .

4.
Effective marginal tax rates are high under the existing welfare system.
A negative income tax system requiring high tax rates is therefore not
necessarily disadvantaged in comparison with the present welfare payment
system. One issue is what tax schedule would be required to finance a
negative income tax system.

5.
Negative income tax methods of welfare delivery could be
particularised to specific groups.

6.
The issue with all welfare delivery systems in promoting incentives to
work is the low rates of response of the labour supply to after tax incentives.
This has been demonstrated for welfare payments generally and also in
experiments with negative income tax systems.

7.
New Zealand unkowingly has an extensive system of negative income
tax welfare payments.

8.
One part of this is the family tax credit. It is a cash grant of $15080 p.a.
after which each dollar of income is taxed at 100% until the lump sum is paid
back. Education and health services are lump sums paid in kind. Families

receiving them pay income tax on market income. The services thereby meet
the two requirements for a negative income tax. Present welfare payments
can be shown to be equivalent to a complicated system of selective or
earmarked negative income taxes.

9.
The negative income tax framework is a useful way of conceptualising
the current New Zealand welfare payment system and thinking about reforms
to it. There is a diagrammatic representation of the scheme in the Appendix.
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1.  Introduction

10.
A  comprehensive  negative  income  tax  fully  integrates  the  tax  and
welfare payment systems and is the only way of doing so. It consolidates the
two systems.

11.
A  negative  income  tax  system  requires  just  two  things:  a  lump  sum
transfer from the Government to a person and a tax on market income.

12.
The term is a mite confusing. Positive income tax is paid by people to
the  Government.  Negative  income  tax  is  paid  by  the  Government  to  the
people. The receipt of money from the Government is the negative tax as far
as the household is concerned because tax money usually flows in the other
direction.  Think  of  it  as  a  poll  tax  in  reverse.  Instead  of  paying  it  a  person
receives it from the Government.

13.
The negative income tax provides a single type of benefit that is a lump
sum  payment  made  at,  say,  the  beginning  of  the  period  though  in  practice
probably  at  intervals  through  it.  That  is  the  end  of  the  benefit  side  of  the
tax/welfare  system.  Thereafter,  all  is  tax.  Tax  is  applied  only  on  what  is
subsequently earned. There may or may not be a single tax schedule for all.

14.
The  system  can  be  seamless  between  transfers  to  and  from  the
Government.  Threshold  problems  need  not  emerge.  There  is  no  point  in
falsifying  welfare  claims  if  there  is  universal  entitlement.  Tax  fraud  remains
profitable.

15.
A negative income tax need not be as comprehensive as this and it can
be piecemeal, earmarked or in kind as we will see.

16.
A  negative  income  tax  system  would  not  impose  marginal  tax  rates
above 100% the way the existing tax/abatement regime occasionally does.

17.
Beneficiaries  apparently  see  at  present  just  the  total  of  the  welfare
payments  that  they  receive  without  distinguishing  the  component  benefits.
There need be no separate benefits in the lump sum of the negative income
tax.

18.
The conflicting requirements of a decent living standard, low breakeven
income (the level of earned income where benefits are clawed back in tax or
benefit abatement), low tax or abatement rates, and low budgetary cost apply
to al  welfare payment systems.

19.
There is a diagrammatic representation of the scheme in the Appendix
where design and important issues around incentives to work are discussed.

2. Features of the System

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20.
The  advantages  of  the  negative  income  tax  method  of  poor  relief  are
that,

•  It is administratively cheap and transparent to beneficiaries.
•  Horizontal equity is preserved.
•  Work incentives are the same for al .

21.
The  negative  income  tax  system  is  distinguished  from  earmarked
welfare  payments  which  have  effects  that  are  the  opposite  of  these.
Earmarked  welfare  payments  provide  sub-groups  with  individualised  welfare
benefits.  High  effective  tax  rates  of  the  abatement  regimes  can  be  a
consequence  of  beneficiaries  receiving  more  than  one  earmarked  benefit,  a
core benefit and a supplementary benefit. Labour market inefficiencies result.

22.
If  the  negative  income  tax  reached  a  significant  portion  of  or  even  all
the population, it would be expensive and marginal tax rates have therefore to
be high for at least some taxpayers in order to finance it or recoup it. There
would  then  be  significant  work  disincentives  with  it,  as  there  are  with  the
extant earmarked benefits.

3. Marginal Tax Rates

23.
The relatively high marginal rates of income tax that would accompany
a  negative  income  tax  system  with  broad  coverage  is  not  a  particularly
important  objection  to  it.  This  is  because  the  system  of  earmarked  benefits
that we have at present is widespread and is accompanied by high effective
tax rates.

24.
An extensive negative income tax system would probably involve high
marginal tax rates because of the Government’s budget imperative. In its pure
form  a  negative  income  tax  system  would  have  the  same  tax  schedule
applying  to  everyone’s  market  income.  The  difference  between  this  and  the
high effective marginal tax rate system is that the present skyscraper skyline
diagram  of  effective  marginal  tax  rates  need  not  accompany  the  negative
income  tax  system.  Labour  market  distortions  should  be  less  under  the
negative income tax system than under the present system of supporting the
poor.

25.
The proper question is, given the broad coverage and high EMTRs of
the  present  benefit  system,  what  income  tax  schedule  would  be  required  to
finance a parallel negative income tax system?

4. Earmarked Negative Income Taxes

26.
Half way houses seem possible, like applying the negative income tax
system  to earmarked groups. The  trick  to  cost  containment  would  be  to  sort
groups  by  non-economic  criteria  that  are  not  readily  under  the  control  of
individuals, or that are costly for them to meet.

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27.
The privileged status of one group causes others to try to join it. Their
success  in  joining  would  raise  the  budgetary  cost  of  a  programme  and  the
new  members  may  not  be  work  responsive.  Any  social  assistance  scheme
contains an incentive to move from work to welfare in some degree. This may
make  their  effects  on  the  distribution  of  income  ambiguous.  Take  the  case
where  sizeable  numbers  went  from  work  to  welfare,  accepting  an  income
reduction.  This  increases  the  income  inequality  that  the  programmes  are
designed to reduce.

28.
Demographic  characteristics  are  the  obvious  selection  criteria  for  a
restricted  system  of  negative  income  tax.  Age,  gender,  congenital
abnormalities  and  dependents  are  either  impossible  or  costly  to  modify.
Excluded groups cannot readily join in. Earmarked groups could be taken off
their present benefits and become a part of the restricted negative income tax
system.

29.
For example, all or some DPB beneficiaries could be given a suitable
weekly lump sum, usually expressed as a fraction of the average wage. Then,
whatever  they  earned  above  this  could  be  taxed  at  the  income  tax  rates
applying to non-beneficiaries. The high EMTRs inherent in the current benefit
abatement and  income  tax  regimes  are  removed  for  them  as  a  result. Work
incentives  improve  for  this  earmarked  group.  This  is  an  earmarked  negative
income tax system.

30.
In a pure form of negative income tax the same lump sum is paid to all
though  this  need  not  be  the  case.  Lump  sums  could  rise  with  family  size  or
other circumstances. Administration costs would rise with them.

31.
It is not necessary for its operation that the beneficiaries of the negative
income tax face the same income tax schedule as other taxpayers. There are,
however,  clear  administrative  and  labour  market  efficiency  advantages  a
single tax schedule.

5. Responsiveness

32.
Groups with the higher labour supply elasticities are the ones that are
the better candidates for an earmarked negative income tax rate, as long as
their  memberships  can  be  circumscribed  for  budgetary  reasons,  perhaps  by
demographic criteria.

33.
The rates of response of work effort to changes in after tax wages are
typically  low.  Deadweight  losses  are  probably  low  because  of  it.  From  this
point  of  view  beneficiaries’  present  high  effective  marginal  tax  rates  involve

little  social  cost  in  the  economic  sense  of  the  term  because  their  labour
supplies are probably inelastic.

34.
It  is  hard  to  see  why  the  high  EMTRs  receive  the  attention  in  policy
discussion  that  they  do  when  their  economic  welfare  costs  are  likely  to  be
small.

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35.
Just  as  the  present  welfare  system  appears  to  do  little  to  get  people
working,  not  too  much  should  be  expected  of  a  negative  income  tax  either,
and for the same reasons viz, the supposedly low labour supply elasticities.

36.
This expectation has been confirmed by experiments with the negative
income tax. There were tests of this welfare delivery method in the 1970’s in
New  Jersy,  Gary  Indianna,  Seattle,  Denver  and  in  Manitoba.  The  Denver
experiment lasted eight years.

37.
The designers of the negative income tax have problems with al  of the
experiments because,

•  The lump sums were set at too high a level.
•  It did not replace other benefits but was in addition to them.

It  is  for  these  reasons  that  one  of  them  (Milton  Friedman)  publicly  opposed
President Nixon’s variation of the scheme2.

38.
There have been a number of studies of the work incentives in the Aid
to  Families  with  Dependent  Children  programme  in  the  USA.  This  is  not  a
negative income tax but nevertheless,

Changing benefits formulas to increase work incentives are likely to generate
minimal increases in the labour supply3

6. New Zealand Case

39.
A negative income tax requires just two things: an untaxed lump sum
and a tax on market income.

40.
Without  realising  it,  New  Zealand  presently  operates  an  extensive
though  complicated  negative  income  tax.  There  are  three  parts  to  the  New
Zealand negative income tax (i.e. welfare) system. One is through Family Tax
Credit scheme and some similar practices, another is through benefits in kind
and the other is the current general welfare payment system. We treat them in
turn.

41.
The  Family  Tax  Credit  is  a  negative  income  tax.  It  applies  to  a
restricted  group  of  people  who  receive  a  cash  grant  of  $15080  p.a.  Each
dollar  of  market  income  reduces  the  $15080  by  one  dollar4.  The  two
requirements  of  a  negative  income  tax  are  therefore  met  by  this  welfare
benefit. These are the lump sum grant and the taxation of market income. In

this case the lump sum grant from the Government is not of a gross amount,
though it can be converted to one, and the tax-abatement rate is 100%. This
along  with  other  tax  credits  is  the  first  of  New  Zealand’s  negative  income
taxes.

2 Parker, Hermione (1989). Instead of the Dole. Routledge, London. p 144.
3 Hoynes, H.W.(1996) Work Welfare and Family Structure: What have We Learned? National
Bureau of Economic Research, Cambridge MA. Working Paper 5644 p 34.
4 This dollar reduction is composed first of income tax and then of the abatement tax.
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42.
The second negative income tax system is of payments in kind. Health
and  education  goods  are  transfer  payments  in  kind  that  the  Government
provides to families. These do not abate, they are lump sum transfers in kind
and are unrelated to income, just like a full scale negative income tax would
be.  Education  and  health  recipients  pay  tax  on  their  market  income  at  the
standard income tax schedule. They are on a negative income tax system for
health and education goods.

43.
Negative income tax types of transfers in kind could be extended. Food
stamps and rent subsidies are obvious extensions. Payments in kind are not
optimal for  the  recipients because  they  will  be better off,  by  their own  lights,
upon the receipt of a benefit to the same value in cash.

44.
We  do  not  hear  these  optimality  arguments  mounted  to  replace
negative  income  taxes  in  kind  by  cash  transfers.  This  is  because  taxpayers
want to know what the transfers are being spent on.

45.
A  voucher  system  of  welfare  payments  preserves  the  specified  good
characteristic of the transfer and would also be a negative income tax in kind
that  is  supposedly  more  economically  efficient  than  state  produced  goods.
The  accommodation  supplement  is  similar  to  a  voucher  inasmuch  as  the
recipient can spend it on any supplier of a specified good.

46.
The  current  cash  welfare  payments  are  the  third  component  of  New
Zealand’s negative income tax system. The current system of the payment of
cash  benefits  is  a  complicated  negative  income  tax  system  though  it  is  not
seen as such because of the way that the abatement regimes are interpreted.

47.
We see abatement as reducing the amount of the benefit in the hand
as income increases. And we see income tax as reducing income in the hand
as  income  increases.  These  viewpoints  probably  arise  because  of  the
separate  functions  of  the  Department  of  Work  and  Income  and  the  Inland
Revenue Department. We will look at them a little differently.

48.
It will be helpful to imagine that the “first” division of the Department of
Work and Income decides on an applicant’s gross benefit entitlement and that
the “second” division applies the abatement regime.

49.
Let us focus on the second division’s activity. A beneficiary would see
no economic distinction between a reduction in a welfare cheque determined
by the second division and the same reduction in take-home market income
determined  by  the  Inland  Revenue  Department.  The  person’s  disposable

income  is  reduced  by  the  same  amount  and  has  the  same  smaller  total  in
each  case.  Income  tax  and  abatement  have  the  same  effect  on  the
beneficiary, as long as the penalties are equal. The reason for this is that is
that abatement and income tax are both determined by the amount of market
income.

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50.
An  abatement  at  70  cents  in  the  dollar  is  entirely  equivalent  to  an
income  tax  at  the  same  rate  as  far  as  the  income-taxpaying-beneficiary  is
concerned.

51.
To  a  beneficiary,  a  particular  abated  benefit  plus  an  after  tax  market
income  is  therefore  equivalent  to  a  lump  sum  benefit  plus  a  gross  market
income that is taxed at a rate suitably greater than is specified by the statutory
income tax schedule. A welfare payment under the current system has been
shown to meet the two requirements of a negative income tax, the lump sum
transfer and a tax on market income.

52.
This  proves  our  point.  The  incentive  effects  of  the  benefit-abatement-
income–tax regimes are the same as a specific and highly structured negative
income tax system as far as beneficiaries are concerned.

53.
We  can,  and  we  perhaps  should,  view  the  present  tax  and  benefit
systems  as  complicated  negative  income  tax  regimes.  This  would  provide  a
framework for welfare payment reform, if reform is necessary.

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APPENDIX

54.
The diagram for a person under a negative income tax is,

Negative Income Tax

                 Disposable
                 Income                     C

                                            B    Disposable Income
                            D          A
                   $10,000

                              45O

                                      Before Tax Market Income

55.
The solid line shows the person’s disposable income. The lump sum
transfer from the Government is $10,000 at point D. As the person earns
income in the market place tax is paid just on that income. The slope of DB
reflects that first rate of income tax. At point A the tax paid equals the lump
sum transfer payment. At point B the tax rate reduces and at C it increases.
The negative income tax is $10,000 because that is what the Government
gives the person.

56.
The characteristics of the disposable income line reflects the incentives
to work that are designed into the negative income tax system. The flatter is a
segment the higher is the tax rate. Different designs shift the disposable
income line and alter the slopes of the segments, i.e. the tax rates.

57.
The slope of DB reflects a relatively high first tax rate to clawback the
transfer. Point A is the clawback point, where tax paid equals the transfer
received, and is always at a market income of the lump sum divided by the
first tax rate, $10,000/(tax rate) in this case. A lower first income tax rate
moves point A north-east and increases the fiscal cost of the scheme. Points
A and B could coincide.

58.
The type of tax schedule reflected in the diagram carries the problem
that the taxpayer-beneficiary can be trapped on segment DB. Schedules that
bend the other way can also leave them stuck - at a kink such as C.

59.
These sorts of problems apply to most tax schedules and they are not
peculiar to the negative income tax system. Their importance is that they
show that transfers, wages and taxes are only half of the incentive story.

60.
The full picture involves the individual’s personal evaluations. The
incentive to work is not the after tax and transfer wage. The incentive is
the difference between this amount and the individual’s personal valuation of
an hour’s work times a constant. When this difference is positive a person will
increase the amount of work that they do.

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Modelling a Cost-Neutral Guaranteed Minimum Income (GMI) Scheme – Welfare Working Group 2010

STATUS QUO – Summary of fiscal costs and measures under
Model 1 – GMI with NZ Superannuation
Model 1 Contd.
settings for the 2011/12 tax year

Model specifications
Winners and Losers – Model 1 compared to status quo settings
  The status quo model incorporates the personal tax structure as
  Benefit system abolished

from 1 October 2010:
  Status quo settings for NZ Superannuation retained
Families

  Working for Families retained – payments for dependants aged 16
(total across
# Families
% Families
population)
Income
Rate
– 18 set to zero
$0 – 14,000
10.5%
Winners
1,485,353
65.86%
  GMI  scheme  -  payment  of  $300  per  week  for  each  person
$14,001 - $48,000
17.5%
Losers
769,433
34.12%
between  the  ages  of  16  and  64  inclusive  -  people  aged  over  64
$48,001 - $70,000
30.0%
No Change
-
-
who do not receive NZ Superannuation are eligible for GMI
Over $70,000
33.0%
Total

  All other settings and assumptions as per BEFU 2010
(approx.)
2,255,260

Mainly super
  GST set at 15%

annuitants and high
  Rates for core benefits, Working for Families and NZ
Fiscal Cost of GMI
Households
income earners
(total across
# HH
% HH
Superannuation and income projections are based on

population)
assumptions and settings from the Budget Economic and Fiscal

Winners
1,004,174
60.51%
Update (BEFU), 2010
Weekly payment for GMI
$300
Total population
4,344,921
Losers
655,357
39.49%

# People eligible for GMI
2,839,284
No Change
-
-

Total
Total
1,659,531

($ millions)
Fiscal cost of GMI ($ millions)
$44,463

Financial Assistance

Equality and Poverty Measures
Invalid Benefit
$ 1,457.3
Estimating a flat tax for GMI
Sickness Benefit
$     884.3

Domestic Purposes Benefit
$ 1,614.3

Total

Equality
Widows Benefit
$     264.9
($ millions)
Measures
Unemployment Benefit
$ 1,082.1
Financial Assistance

Gini Coefficient
0.349
NZ Super and Veterans Pension
$ 8,246.3
General Minimum Income (GMI)
$ 44,463
80 / 20 Ratio
3.491
Under Age Non-Qualified Partner
$    184.1
Working for Families
$   2,813

Supplementary Assistance
$    748.0
NZ Super and Veterans Pension
$   8,262
Poverty Reference Line
Median HH disposable income
Other Benefits
$    518.4
Social Transfers Total
$ 55,537
(equivalised)
Student Allowance
$    319.9

Relative Reference
$36,009
Working for Families Tax Credit Total
$   2,848.2
Taxation

Social Transfers Total
$   17,983.7
Taxable income
$  122,380
Poverty line: % of relative reference line
% HH below poverty line

Tax NZ Super
$      969
50% relative
22.2%
Taxation

Total Tax payable
$   23,801
60% relative
27.4%
Tax on Benefits
$    584.5

70% relative
32.3%
Tax on Super
$    967.2
Net Benefit Cost (Tax Payable – Total

Other income tax
$   22,939.0
Social Welfare)
-$    31,736

Individual Rebates
$     18.9

The redistributive effect of GMI with NZ Superannuation
Tax Payable
$   24,471.8
  For cost-neutrality (whereby  social assistance payments are fully

funded by personal tax revenue),  tax  payable  needs  to  be  $
Better off compared to SQ -  households in deciles 3 to 8

Equality
55,537 million
Worse off - mainly superannuitants who are in deciles 1 and 2 and high
Measures
  Revenue  from  personal  taxes  under  1  October  2010  settings  is
income earners (mainly decile10) whose higher tax contribution exceeds
Gini Coefficient
0.355
estimated at $ 23,801 million
the GMI payment
80 / 20 Ratio
3.010
  Additional amount to raise from personal tax to fund GMI $ 31,736

million
Poverty Reference Line
Median HH disposable income
(equivalised)
  The  tax  rate  that  raises  this  additional  amount  is  ($55,537  /
Relative Reference
$31,671
$122,380) ≈  45.4% (this is the flat tax rate for cost-neutrality)


Poverty line: % of relative reference line
% households below poverty line
Taxwell simulation with a flat tax of 45.4%
50% relative
13.4%

60% relative
23.7%

Total
70% relative
32.1%
($ millions)

Financial Assistance

Notes:
General inimum Income (GMI)
$ 44,463
Increase
  This analysis is based on Statistics New Zealand’s ‘Household
Working for Families
$   2,946
mainly due to
MFTC
and Economic Survey’ (HES) 2008/09 – results are subject to
NZ Super and Veterans Pension
$    4,596
sampling error
Social Transfers Total
$ 52,005

Fiscal  cost  estimates  detailed  here  are  generated  using
Taxation

Broadly cost-
Treasury’s static micro-simulation model ‘Taxwel ’  –  these  may
Taxable income
$  118,716
neutral

differ  from  official  Inland  Revenue  Department  (IRD)  and  Ministry  of
Tax NZ Super
$   2,081
Social Development (MSD) forecasts
Total Tax payable
$   53,843

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Modelling a Cost-Neutral Guaranteed Minimum Income (GMI) Scheme – Welfare Working Group 2010

Model 2 – GMI without NZ Superannuation
Model 2 Contd.
Model 2A – Model 2 without Working for Families

Model specifications
Winners and Losers - Model 2 compared to status quo settings
Model specifications



  Benefit system abolished
Families
# Families
% Families
  As for model 2 but with Working for Families abolished and
  NZ Superannuation abolished
(total across
replaced with a payment of $86 per child per week (assuming

population)
Working for Families retained – payments for dependants aged 16
Winners
1, 466,69
65.03%
child is aged 0 to 15)
– 18 set to zero
Losers
788,094
34.94%

  GMI scheme  - payment of $300 per week for each person  aged
No Change
-
-
Fiscal Cost
16 years and older.
Total
2,255,260

  All other settings and assumptions as per BEFU 2010
(approx.)

Weekly payment for GMI
$300
Fiscal Cost of GMI
Households
# HH
% HH
Total population
4,344,921

(total across
# People eligible for GMI
3,361,325
population)

# Children eligible for weekly
983,596
Winners
1,039,695
62.65%
Weekly payment for GMI
$300
payment
Losers
619,836
37.35%
Total population
4,344,921

No Change
-
-
# People eligible for GMI
3,361,325

Total
1,659,531

Fiscal cost of GMI ($ millions)
$52,638

Total

($ millions)

Financial Assistance

Total
Equality and Poverty Measures
General Minimum Income (GMI)
$ 52,638
($ millions)

Weekly child payment
$   4,416
Financial Assistance

Equality
Social Transfers Total
$ 57,054
General Minimum Income (GMI)
$ 52,638
Measures

Working for Families
$   2,819
Gini Coefficient
0.294
Taxation

Social Transfers Total
$ 55,458
80 / 20 Ratio
2.622
Taxable income
$ 114,127

Total Tax payable
$ 22,581
Taxation

Poverty Reference Line
Median HH disposable income

Taxable income
$ 114,127
(equivalised)
Net Benefit Cost (Tax Payable – Total
-$ 34,473
Total Tax payable
$ 22,581
Relative Reference
$36,381
Social Welfare)

Net Benefit Cost (Tax Payable – Total
-$ 32,876
Poverty line: % of relative reference line
% HH below poverty line
Tax rate that funds this scheme
50%
Social Welfare)
50% relative
14.1%

60% relative
22.7%
Taxwell simulation with a flat tax of 50%
  For  cost-neutrality (whereby social assistance payments are fully
70% relative
29.0%

funded by personal tax revenue),  tax  payable  needs  to  be

Total
$55,458 mil ion
The redistributive effect of GMI without NZ Superannuation
($ million )
  Revenue from personal taxes under 1 October 2010 tax settings

Social Transfers Total
$ 57,054
is estimated at $22,581 mil ion
Better off compared to SQ -  mainly households in deciles 1 to 7

  Additional  amount  to  raise  from  personal  taxes  to  fund  GMI
Worse off – households in deciles 9 and 10
Taxation

Taxable income
$ 114,127
$32,876 million

Total Tax payable
$  57,042
  The  tax  rate  that  raises  this  additional  amount  is  ($55,458  /

$114,127) ≈  48.6% (this is the flat tax rate for cost-neutrality)
Equality and Poverty Measures

Taxwell simulation with a flat tax of 48.6%

Equality

Measures

Total
Gini Coefficient
0.292
($ million )
80 / 20 Ratio
2.646
Financial Assistance

General Minimum Income (GMI)
$ 52,638
Poverty Reference Line
Median HH disposable income
Working for Families
$  2,993
(equivalised)
Social Transfers Total
$ 55,631
Relative Reference
$36,644

Taxation

Broadly cost-
Taxable income
$ 114,127
Other poverty measures similar to those for model 2
neutral
Total Tax payable
$  55,444

Contacts for further information:

  A flat tax of ≈  49% (that broadly allows cost-neutrality) converts
Gerald Minnee  s9(2)(k)
Omar A. Aziz  s9(2)(k)
the tax less transfers deficit to a surplus

IN-CONFIDENCE
2
Manager - Economic, Research
Analyst - Economic Research and

and Analysis Unit
Analysis Unit

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The Treasury’s position on income adequacy and
poverty: previous advice and potential directions

Barbara Annesley
7 April 2017

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Executive Summary

This report reviews previous Treasury advice on policy settings that directly influence income
adequacy: taxes and transfers, wages and other work incentives. It considers this advice in relation
to data about the adequacy of current benefits and wages, evidence on the effectiveness of different
levers for addressing poverty, and wider social and labour market changes.
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IN-CONFIDENCE
Current and emerging labour market trends in New Zealand and overseas point to risks associated
with low work intensity and precarious employment.  These risks may contribute to reduced income
adequacy, security, mobility and smoothing over the life-course. In response to such trends there
have been calls for a shift from highly targeted to universal forms of income support, and from re-
distributive mechanisms (such as tax credits) to approaches that ensure earned income is sufficient
to meet basic needs (such as ‘living wage’ proposals).
While previous Treasury advice is high quality, analytically sound and reflective of the agencies wider
economic and fiscal interests, there is scope to strengthen it further.  Suggested areas of focus for
future work include: clarifying the application of the Living Standards Framework and investment
approach to some income adequacy policy settings; better articulation of the respective roles and
application of targeted and universal approaches; additional analysis and modelling of the universal
basic income or similar concepts; the provision of advice on opportunities to improve the integrity
and coherence of the tax and transfer system; and a deep-dive analysis of trends and determinants
of wage levels at the lower end of the income distribution.


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Introduction

1.  This report reviews previous Treasury advice related to income adequacy, considers relevant
New Zealand and overseas trends and developments, and identifies potential areas of focus and
opportunities to strengthen future Treasury advice.

2.  Deleted - Not Relevant to Request
3.

4.  This report is accompanied by a slide pack that provides visual and summary information on the
key points.

4

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•

Treasury advice on directions for change in existing policy
se
(slide 17)
44. Deleted - Not Relevant to Request
45.
46. A consistent message in Treasury advice is that universal benefits, and changes to tax settings
and wage levels (e.g. minimum wage increases, a ‘living wage’) are ineffective mechanisms for
addressing poverty and material hardship.  Advice notes that they are costly and poorly targeted,
with the potential to create significant labour market and economic distortions.

47.  Deleted - Not Relevant to Request

18

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78.
79.
Emerging challenges to targeted approaches to income support
and social investment (slide 24)

80. Central to Treasury’s advice on income adequacy and the social investment approach is an
emphasis on closely targeting assistance to those who stand to benefit the most, including using
administrative data to identify risk propensity.

12 The OECD defines activation strategies as aiming to “bring more people into the effective labour force, to counteract the
potential effects of unemployment and related benefits on work incentives by enforcing their conditionality on active job
search and participation in measures to improve employability, and to manage employment services and other measures so
that they effectively promote and assist the return to work” (Martin, 2014, Pg 3)
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81. Standing in stark contrast to this is the growing political momentum and popular support for
more universal and broad-based approaches to poverty reduction, such as through the provision
of universal child benefits or a universal basic income (UBI) to replace existing means-tested and
work-tested income support.

Universal basic income (slide 25)
82. The idea of a Universal Basic Income has a long history, and has recently re-emerged in response
to a range of social and economic changes.  These include increased inequality of income and
wealth, the changing nature of work (particularly the rise of precarious and part-time
employment), lack of recognition and value attached to unpaid family responsibilities and
voluntary work, and concerns about some of the downsides of narrowly targeted income support
(e.g. their stigmatising nature, poverty traps and work disincentives, and administrative
complexity).

83. The general idea of a UBI is to provide everyone in the population (or a subsection thereof) with
a minimum level of income, generally with no work obligations or means-testing.  It’s important
to note, however that there is not one version of UBI – specific versions can include abatements
and targeted additional support.

84. Proponents of a UBI suggest that it is likely to have multiple and varied benefits, including
reduced bureaucracy as a result of its administrative simplicity, reduced family stress, improved
incentives to develop skills and be entrepreneurial, better skills matching and labour market
efficiency (as people will be able to be more selective about the employment they undertake)
and increased household savings and spending, contributing to economic growth.

85. Many of these suggested benefits are purely speculative, and the lack of a robust evidence base
makes it difficult to ascertain the extent to which they would be realised.  Many commentators
and policymakers have drawn attention to the significant costs associated with implementing a
UBI, along with other issues such as negative effects on work incentives, reduced returns to skills,
potential for employers to reduce wages and exploit vulnerable workers; regressive
redistribution of government transfers to middle income earners.

86. For these reasons, even many of those who support the UBI concept in principle advocate a
cautious approach to its adoption, such as small-scale trials to its effectiveness in delivering
expected outcomes.  Current and proposed overseas examples of such trials include:

•  Finland: 2000 randomly selected unemployed people will receive a basic income instead of a
benefit for 2 years
•  Netherlands:  250 beneficiaries in Utrecht will receive a flat sum guaranteed income for 2
years

•  Italy: 200 families in Livorno have received a basic monthly income, with plans to expand this
further
•  Ontario, Canada: the provincial government is currently consulting on details of a potential
pilot project to test UBI in three sites
•  Glasgow, Scotland: the city’s council is partnering with the Royal Society of Arts to research
the design of a pilot UBI project
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•  USA: Professor Greg Duncan (an economist at the University of California) and colleagues
from a number of other major American universities have completed a pilot study looking at
the impact of UBI receipt on children’s brain development, and are planning a larger study
involving 1000 low-income mothers and their children.

87. Closer to home, several political parties have indicated support, to a greater or lesser extent, for
a UBI.  The Green Party has said that they support debate and experimentation; the Labour Party
has signalled that it would consider a limited trial of a UBI, while its ‘Future of Work’ discussion
document suggests combining a lower UBI with targeted supplemental support.   The newly
established ‘The Opportunities Party’, has released a detailed proposal outlining a progressive
approach to introducing an Unconditional Basic Income, starting with $200 per week to all
families with children aged under 3 (replacing paid parental leave) and for all people aged over
65 (replacing New Zealand Superannuation, but accompanied by a means-tested top-up). This
would be augmented by an additional non-work tested payment of $72 per week to all low
income families with dependent children (replacing the current In-Work Tax Credit) and free full-
time childcare for the under 3 year olds from families with low income parents engaged in any
paid work.

88. While Treasury hasn’t undertaken a general analysis of UBI, in 2010 it undertook ‘preliminary’
modelling for the Welfare Working Group (WWG) on a specific UBI proposal involving a universal
and unconditional payment of $300 per week to all individuals aged 16 and over, with an extra
payment to families with children.  This modelling highlighted a range of issues and negative
consequences, not least of which is the considerable fiscal cost.  The following table summarises
the Treasury’s conclusions about the GMI scheme, and this appears to stands as Treasury’s
advice on UBIs to date (slide 26).
Table 4: UBI Benefits and Costs identified by the Treasury, 2010
Benefits
Costs
•  More equal distribution of income
•  Poverty is either increased across all relative levels as
•  Removes disincentive for beneficiaries
Superannuitants have their payment decreased by
to undertake part-time work
44% on average*, or is increased when measured at
•  Poverty is reduced but only at the 60
the 50 percent relative level*.
and 70 percent relative levels*
•  Horizontal equity problems due to differential
•  May improve labour market outcomes in
treatment of one and two parent families
some areas: more employee flexibility;
•  Many current beneficiaries (e.g. sole parents, the
encourages unpaid work; additional
disabled and carers) will be financially worse off
employee bargaining power; encourages
under the scheme
entrepreneurial activity; and reduces the
•  Reduces the supply of labour: decreases hours
opportunity cost of full time training or
worked; increases migration of skilled workers;
education.
discourages people from taking entry level jobs;
•  Lowers administrative, management and
discourages further education and training; and the
operating costs
EMTRs for families with children are very high
discouraging further work, MFTC*.
* These specific effects relate to one or more of

•  High personal income taxes have negative
the three versions of the GMI that were modelled
implications for saving, investment and productivity
by Treasury.  Fuller information is contained in
the Treasury report
•  Lowers economic growth (estimated at 2.8
percentage points per year)

•  Non-alignment causes integrity and coherence issues
for the tax system
(GMI - A Preliminary Assessment of the Tax and Equity Implications:1909076) .
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89. A core assumption in Treasury’s 2010 modelling was that the GMI scheme would be funded by
increased personal income tax, although it was noted that it may be possible to fund part of the
GMI by increasing other taxes, by base broadening, or by reducing government expenditure in
other areas.

90. In developing advice for the incoming government, Treasury should consider providing well-
considered advice on the risks and benefits of a UBI-type approach to income support, key design
considerations, and options for meeting the costs associated with such a policy.  This is likely to
require new modelling to reflect different assumptions. Treasury could also consider presenting
alternative options that could achieve similar objectives to a UBI, with fewer downsides.

91. More generally, the UBI debate highlights the perceived binary nature of targeted and universal
approaches to improving income adequacy and distribution.  In reality, all systems have a
combination of both approaches.  Even within an investment approach, there will continue to be
a core set of universal provisions (e.g. in health and education), with explicit decisions needed
about the balance between these and more targeted interventions.

92. There may be value in Treasury better articulating the respective roles of targeted vs universal
support and services.   A report by Gugushvili and Hirsch (2014) reviews the effectiveness of
universal and targeted social spending in reducing poverty, against the background of
longstanding debate and emerging evidence in this area.  They note that the universal vs. means-
tested debate is far from resolved, but that more recent studies have challenged the previously
established correlation between universal systems, higher redistribution and improved poverty
reduction.  Sen (2009) whose work on capabilities has strongly influenced Treasury’s Living
Standards Framework, has also written on the political economy of targeting.

Deleted - Not Relevant to Request

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31

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Suggested areas of focus for future Treasury advice

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•  Clarifying its policy position and strengthening advice on the roles and respective uses of
targeted vs universal support and services, and the balance between them.

105.
With regard to welfare settings, Treasury could (slide 31):

•  Deleted - Not Relevant to Request
•  Refresh modelling and analysis in relation to the universal basic income concept, to take
account of current international developments and New Zealand proposals (though not
costing specific political party policies);
•  Deleted - Not Relevant to Request
•

106.

•
•
•


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References

Anon (2009) Design of the Income Tax / Transfer System: Background Paper for the Tax
Working Group.  24 July 2009.
Australian Government Productivity Commission (2015) Tax and Transfer Incidence in
Australia.  Commission Working Paper, Canberra. October 2015
Burton, Tony, Louise Butler, Melissa Piscetek, Caroline Reid, Paul Rodway and Robert
Templeton (2016)  The benefits of improved social sector performance.  Background paper for
He Tirohanga Mokopuna: 2016 Statement on the Long-Term Fiscal Position. New Zealand
Treasury. November 2016
Cleland, Alice, Amapola Generosa, Ben Wallace, Dan Harvey and Holly Norton (2016) The
workforce, workplace and the nature of work: A snapshot of key trends.  Ministry of Business,
Innovation and Employment.
Conway, Paul, Lisa Meehan & Dean Parham (2015) Who benefits from productivity growth? –
The labour income share in New Zealand, New Zealand Productivity Commission Working
Paper 2015/1. Wellington: Productivity Commission.
Design of the Income Tax/Transfer System: Background paper for the Tax Working Group
(http://www.victoria.ac.nz/sacl/cagtr/twg/Publications/taxes_transfers.pdf)
Eichhorst, Werner (2017) Labour market institutions and the future of work: Good jobs for all?
IZA Institute of Labour Economics Policy Paper Series. IZA Policy Paper No. 122. January 2017
Fletcher, Michael (2015) The structure and generosity of financial assistance for beneficiaries:
How New Zealand compares with other OECD countries.  March 2015.  Retrieved from the
New Zealand Ministry of Social Development website
(https://www.msd.govt.nz/documents/about-msd-and-our-work/publications-
resources/research/social-assistance-international-comparisons/social-assistance-
international-comparisons-publication-version.docx
Gregg, Paul (2012) Pre-distribution opens up a new set of policy tools but also a key constraint.
www.blogs.lse.ac.uk
Gugushvili, Dimitri and Donald Hirsch (2014) Means-tested and universal approaches to
poverty: international evidence and how the UK compares.  Centre for Research in Social Policy
Working Paper 640. Loughborough University.  August 2014

Hirsch, Donald (2013)  Paying for children: the state’s changing role and income adequacy.
Journal of Social Policy.  Volume 42, Number 3, Pgs 495-512
Hurnard, Roger (2012) The assessment of retirement income system options.  A paper for the
external panel on the Treasury’s long-term fiscal statement.  October 2012
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Johnson, Jennifer and Kristie Carter (2015) Increasing Equity Background Paper.  Treasury’s
Living Standards Framework Papers. The New Zealand Treasury. December 2015
Leoni, Thomas (2015) The social investment perspective as guiding principle for welfare state
adjustment. WIFO (the Austrian Institute for Economic Research). May 2015
Maloney, Tim and Amanda Gilbertson (2013) A literature review on the effects of Living Wage
policies.  Auckland Council technical report TR2013/034
Martin, John (2014) Activation and active labour market policies in OECD countries: stylised
facts and evidence on their effectiveness. IZA Policy Paper No 84. June 2014
Nolan, Patrick (2017) Family and work tax credits in five liberal welfare states.  Presentation to
Australasian Tax Teachers Association Conference.  January 2017
Nolan, Patrick (2007) Lifting families’ incomes.  Policy Quarterly.  Volume 3, Issue 2, Pgs 22-29
Nolan, Patrick (undated) When work and marriage do not pay: poverty traps and marriage
penalties in New Zealand’s tax-benefit system.  New Zealand Institute for Economic Research.
OECD (2016) Benefits and Wages Indicators. Printed on 22/03/2017 from
www.oecd.org/ols/social/workincentives
Pacheco, Gail, Philip S Morrison, Bill Cochrane, Stephen Blumenfeld and Bill Rosenberg
(undated) Understanding insecure work.  New Zealand Work Research Institute and Victoria
University of Wellington Centre for Labour, Employment and Work.
Perry, Bryan (2016) Household incomes in New Zealand: Trends in indicators of inequality and
hardship 1982 to 2015.  Ministry of Social Development, Wellington. August 2016
Raven, Jason (2015) Financial incentives to work: the size of the margin between benefits and
in-work incomes.  Policy Quarterly.  Volume 11, Issue 4, November 2015, Pgs 26-33
Rosenberg, Bill (2014) New Zealand’s wages system is buggered.  Briefing papers.
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The Treasury (2010) A guaranteed minimum income for New Zealand: A preliminary
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IN-CONFIDENCE
Other source documents

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March 2016. www.thespinoff.co.nz
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Fletcher, Michael (2016) A Universal Basic Income may be a good idea but we will still need
social security that works.  30 March, 2016. www.briefingpapers.co.nz
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Van Der Linden, Bruno (2016) Do in-work benefits work for low-skilled workers?  IZA World of
Labour 2016: 246.  March 2016 www.wol.iza.org
Whiteford, Peter (undated presentation) adequacy of social security benefits for working age
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d=0ahUKEwij2IPYsP3SAhVilVQKHTdPAfcQFggYMAA&url=http%3A%2F%2Frsss.anu.edu.au%2Fs
ites%2Fdefault%2Ffiles%2FPeterWhiteford.pdf&usg=AFQjCNF_lCVAns-XDZpdU0rxjWx90iqQiQ

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The Treasury’s position on
income adequacy and poverty:
Previous advice and
possible future d

irections
Barbara Annesley
7 April 2017

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Purpose and scope
This work:
 Identifies policy levers and reviews policy advice
 Discusses emerging trends and issues
 Makes suggestions for areas for further work and focus
It doesn’t:
 Provide an exhaustive review of advice, da ta and evidence
 Include a detailed discussion of definitional and measurement issues
 Consider the distribution of income (inequality)
 Propose specific policy changes

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Setting the scene:
Measures, data and policy levers
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NZ has a mix of measures (noting difficulty of cross-
country comparisons)
Public spending on family benefits in cash, in-kind and through tax measures (percentage of GDP, 2013)

Source: OECD Benefits and Wage Indicators Database
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Previous Treasury advice:

Frameworks used, issues identified and proposed
directions for change

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Suggested areas for change identified in Treasury
advice (mainly 2013-15)
 Deleted - Not Relevant to Request


 Universal benefits and changes to personal tax settings and wage levels are not supported as ways to lift

incomes (high cost, poorly targeted, potential distortionary economic and labour market effects)
 Deleted - Not Relevant to Request

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New and emerging considerations:

The nature and quality of employment; challenges
to current paradigms

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Challenges to existing paradigms, settings and
advice
Universal vs. targeted approaches to addressing poverty:
UBI the most obvious example (a response to increased targeting, ‘new social risks’
and changing nature of work)
In reality universal vs. targeted approaches are binary – there’s a place for both
Treasury’s 2010 modelling based on specific set of features and assumptions. Worth
re-visiting and doing modelling a few options

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Universal Basic Income

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Previous Treasury advice on UBI
Benefits
Costs

More equal distribution of income

Poverty is either increased across all relative levels as Superannuitants

Removes disincentive for beneficiaries to
have their payment decreased by 44% on average*, or is increased
undertake part-time work
when measured at the 50 percent relative level*.

Poverty is reduced but only at the 60 and 70

Horizontal equity problems due to differential treatment of one and
percent relative levels*
two parent families

May improve labour market outcomes in

Many current beneficiaries (e.g. sole parents, the disabled and carers)
some areas: more employee flexibility;
will be financially worse off under the scheme
encourages unpaid work; additional employee 
Reduces the supply of labour: decreases hours worked; increases
bargaining power; encourages entrepreneurial
migration of skilled workers; discourages people from taking entry level
activity; and reduces the opportunity cost of
jobs; discourages further education and training; and the EMTRs for
full time training or education.
families wit
h children are very high discouraging further work, MFTC*.

Lowers administrative, management and

High personal income taxes have negative implications for saving,
operating costs
investment and productivity

Lowers economic growth (estimated at 2.8 percentage points per year)

Non-alignment causes integrity and coherence issues for the tax system
* These specific effects relate to one or more of the three versions
of the GMI that were modelled by Treasury.

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Potential areas of f ocus for future
Treasury advice

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At a strategic level, Treasury could:
Deleted - Not Relevant to Request

Clarify its policy position and strengthen advice on the roles and respective uses
of targeted vs universal support and services, and the balance between them

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Document Outline

Table of Contents