Not as equal as we think

Not as equal as we think

We are Australia’s poor cousins, that we all know.   EvenTasmanians, the poorest Australians, earn on average more than 10% per weekthan we do.   While we know we are poorer we like to think that sometimes we haveother worthy attributes.   We are less inclined to invade foreign countries alongsideour traditional allies.   We think we are greener – our per capita carbondioxide emissions are less than half that of Australia’s.   We also like tothink that we have a more equal society.     Greater equality is a popular perceptionbut 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 Developmentscites OECD statistics which show that in the early 2000s New Zealand had the 18th most unequal distribution of income among 25 OECD countries.   Amongthe major English speaking countries Canada and Australia have the lowestinequality and only the United States has higher inequality than New Zealand.

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

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

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

Lower-middle and middle income households have enjoyedsignificant increases in net incomes due to tax and welfare changes on bothsides of the Tasman in recent years.   Australia has passed the fruits ofeconomic growth to working people through tax cuts which encourage growth asthe rewards for work are higher.   Higher economic growth means higher incomesin the future.   In New Zealand the major handout arising from higher governmentrevenues is from Working for Families.   Although the scheme has given a boostto the incomes of lower-middle and middle income households will it helpsustain income growth in the future?  

With a keen eye on equity, the Working for Families benefitsdecline as income rises.   Although reducing inequality it can also reduce the incentiveto work harder as the more you earn the less benefit you receive. There areeven some instances in which individuals perversely earn less by workingharder.   An individual with two young kids earning the minimum wage and working34 hours a week will take home NZ$36,297 after tax and Working for Familiespayments.   If that person increased their hours to 37 a week they would takehome NZ$20 less.   This person needs to pay the state NZ$20 a year to work anextra three hours every week.

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

While New Zealand has a less equitable distribution of incomethan 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 thatWorking for Families has given to lower-middle and middle income households islaudable but the disincentive to work it creates will reduce our ability tosustainably lift incomes of all households. An overzealous pursuit of equitywill only achieve a more even spread of low incomes which is cold comfort toall the Kiwis eying those good jobs across the ditch.

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