Not as equal as we think
Fri 21 Dec 2007 by Andrew Whiteford.

We are Australia’s poor cousins, that we all know.   Even Tasmanians, the poorest Australians, earn on average more than 10% per week than we do.   While we know we are poorer we like to think that sometimes we have other worthy attributes.   We are less inclined to invade foreign countries alongside our traditional allies.   We think we are greener – our per capita carbon dioxide emissions are less than half that of Australia’s.   We also like to think that we have a more equal society.     Greater equality is a popular perception but is incorrect if income distribution is our measure of equality.

Australia has considerably lower income inequality than New Zealand according to OECD measures.   The Social Report from the Ministry of Social Developments cites OECD statistics which show that in the early 2000s New Zealand had the 18th most unequal distribution of income among 25 OECD countries.   Among the major English speaking countries Canada and Australia have the lowest inequality and only the United States has higher inequality than New Zealand.

The OECD figures show that before tax household income is more equitably distributed in Aussie than New Zealand.   But what about after tax and family benefits? Does our tax and benefit system even out the disparities more so than the Australian system?  

Let’s begin by looking at a single person with two kids under five, working full time in New Zealand on the minimum wage.   Earning about NZ$23,000, their net income in New Zealand after tax and family benefits would be about NZ$28,800.   If the same person earned the equivalent market income across the ditch their net income would be NZ$34,100, a whopping 18% higher than in New Zealand.   A high differential in net incomes between the two countries occurs over much of the income spectrum. On an income of NZ$100,000 the differential drops slightly to 17% but it falls off significantly on incomes exceeding the six figure mark.   By NZ$150,000 the difference is 6% and on incomes over NZ$240,000 it pays to be in New Zealand as the higher top tax bracket in Australia comes into effect.

Having looked at the numbers, the question of whether Australia’s tax and welfare system is more progressive than ours is all but irrelevant as just about everybody, except the super wealthy, pay less tax and receive a greater family benefit   in Australia.   The combined impact of much higher before tax earnings in Australia (probably in the order of about 30%) with more favourable tax and benefits means total net earnings are enormously higher across the Tasman.  

Lower-middle and middle income households have enjoyed significant increases in net incomes due to tax and welfare changes on both sides of the Tasman in recent years.   Australia has passed the fruits of economic growth to working people through tax cuts which encourage growth as the rewards for work are higher.   Higher economic growth means higher incomes in the future.   In New Zealand the major handout arising from higher government revenues is from Working for Families.   Although the scheme has given a boost to the incomes of lower-middle and middle income households will it help sustain income growth in the future?  

With a keen eye on equity, the Working for Families benefits decline as income rises.   Although reducing inequality it can also reduce the incentive to work harder as the more you earn the less benefit you receive. There are even some instances in which individuals perversely earn less by working harder.   An individual with two young kids earning the minimum wage and working 34 hours a week will take home NZ$36,297 after tax and Working for Families payments.   If that person increased their hours to 37 a week they would take home NZ$20 less.   This person needs to pay the state NZ$20 a year to work an extra three hours every week.

The above example is an extreme, but many families currently benefitting from Working Families will face the dilemma of a reduced benefit in return for striving to earn more.   The recent decline in the number of woman in the workforce is a likely consequence of the disincentive created by Working for Families.   Discouraging people to work inhibits our economy and its ability to offer all New Zealanders a higher standard of living.

While New Zealand has a less equitable distribution of income than Australia the more important issue is that we are all, rich and poor alike, so much worse off than our cousins across the Tasman.   The lift in income that Working for Families has given to lower-middle and middle income households is laudable but the disincentive to work it creates will reduce our ability to sustainably lift incomes of all households. An overzealous pursuit of equity will only achieve a more even spread of low incomes which is cold comfort to all the Kiwis eying those good jobs across the ditch.

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