Working for Families perversely misunderstood
Bryce Edwards argues that Working for Families is corporate welfare.
In his view WFF is a subsidy to “employers who can’t, or won’t, pay adequate wages.” and that the government is feeding bad employer behaviour by “pouring $370 million more this year into WFF, further entrenching a system which has many critics across the political spectrum.”
Let’s start at the beginning. WFF was not a new scheme suddenly imposed by the Helen Clark led-Labour government.
There has long been an acknowledgement of the extra costs of children and the need for the caregiver to have money specifically for the children.
If we go back to the post war period when I was growing up, the universal family benefit paid to the mother was hugely popular, encouraging an independent and significant income for the stay at home parent, acknowledging the valuable, though unpaid work of child rearing.
We lost the universal element in child assistance after 1991 and during the 1990s and early 2000s the weekly child payment to low income caregivers was seriously eroded by inflation. WFF, introduced in 2005-7, built on the existing child payments providing a vital catch-up to reduce the worrying levels of child poverty.
Inevitably, since WFF is not universal, there is a tapering out as incomes rise above a threshold. It is not at all “extraordinary that families earning around $100,000 qualify for WFF payments” By the time incomes are over $100,000 the amount has diminished either to zero for small families or to small weekly amounts for larger families.
There are sound reasons that tax credits or benefits for children are “very common among the OECD nations”. They are both common and generous. Australia has a much more progressive tax system than NZ, with the first $18,200 tax-free and GST exemptions for basics, yet even there, family tax credits are much more generous than ours. See here. I am not aware of complaints in Australia that it is a subsidy to employers.
Does WFF really affect the wage that employers pay? Do employers really set wages with WFF in mind? Do employers favour those on WFF because they can pay them less. That is more than a bit unlikely. Edwards concludes: “employers are very happy with WFF, as it means that they can continue to pay low wages”.
We can agree however with Edwards that if WFF no longer existed “wages for the lowest paid would have to rapidly increase, otherwise a huge proportion of the workforce would simply not be able to meet their basic costs”.
Let’s take a worker on 40 hours at the living wage of $20.55, giving an annual income of $42,744. Let’s assume that this is deemed a living wage income for an individual. If the worker now partners and has two young children cared for at home by the mother, in order to have the same standard of living as the individual, the family requires 2.17 times as much income (MSD equivalence scales).
If there is no WFF the worker requires an hourly rate of $44.60. Do Edwards and others think that employers should pay at least this amount to all employees, with or without children and regardless of how many children, so that employers are not being subsidised by the taxpayer?
Under the current WFF, this family would be entitled to only $10,620. Their standard of living falls well below that of the worker alone on the same gross ‘living wage’ income. If anything, WFF is not nearly generous enough.
Should employers really pay for the costs of children? If this is the right-wing view I am astonished. Maybe employers need to take on other things like tax-funded Paid Parental Leave and build that into their pay rates too?
The argument that getting rid of WFF allows for tax cuts won’t wash. Even Edwards concedes that “unless there is an increase in the higher marginal tax rates, those who earn the most always get more tax from tax cuts than those on lower incomes.” Let’s go back to the family on $42,700 gross. If their tax was reduced to zero, they would be only $6,493 better off. Sadly, to give that size of tax break is impossible anyway. The $3 billion saved in doing away with WFF could pay just for the first $8,000 to be tax-free, giving our family only $800 for their children and support of the caregiver.
Edwards claims “in nine years in office, National maintained [WFF] in its entirety.” He misses ‘entirely’ that WFF was vastly eroded under National. The extra spending in the Families Package this year barely restores those cuts.
Edwards says “We are living in the age of corporate welfare”. Should we should then say NZ Super, the public health system, benefits, education are all corporate welfare? Those nasty, wealthy employers didn't pay enough to enable everyone to pay for their own retirement, health, unemployment insurance!
In terms of the critics of WFF being across the political spectrum. Edwards clearly has heard the unions parrot the line that WFF is an employer subsidy. Left leaning ‘third way’ politics emphasises inclusion through paid work and that work is the answer to poverty. When it is not, it must be the employer fault in not paying a liveable wage.
The true left-wing critique of WFF has no such narrative. WFF is highly flawed, first because it excludes the poorest children from a significant part because they don’t meet work-based criteria. It should be about the costs of children, not about incentivising paid work. Second, all its parts are not adjusted annually for cost of living and wages. Thus over time the 2018 Families Package will be quickly eroded. Thirdly, it contributes to the effective marginal tax problem faced by the working poor. The Families Package makes this worse. And, finally, it is far too complex.
We do so much better for the old with NZ Super. We should do much better for the young with WFF.
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