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Tuesday, 4 March 2014

Earning more, yet being worse off

From Stuff Nation.
If you work hard and get paid more, you should enjoy the reward for your efforts. A great example of how Labour's Working for Families (WFF) discourages people from getting ahead has popped up - a lady by the name of Debra Bain writes at Stuff Nation that a pay rise for her husband resulted in her family being $150 worse off per week, or $7,800 per year.

This is a great example of a problem economists call an "effective marginal tax rate", in other words, as a result of receiving Working for Families tax credits, you and your family are made worse off as you earn more, because the WFF credits get "clawed back". As the government's tax working group found in 2010, not only does this discourage hard work and people trying to get ahead, it encourages them to find ways to hide their income.

The best way to avoid this problem is to cut income taxes for lower wage earners. This is what National did in 2010. Now three-quarters of wage earners (i.e. those earning below $48,000 per year) pay 17.5% per dollar earned in tax.

My personal view is that a tax-free threshold would be a great way again to boost incomes and reduce "churn" in the tax system. Currently a family with two children receiving WFF tax credits pays no net tax (i.e. they receive more money from the government than they pay to it in taxes) until their income hits $50,000. I can't see why they should then pay income tax. Labour had a policy in 2011 for a measly $5,000 tax free threshold, while the Conservatives and the Greens want a $25,000 tax-free threshold.