With the Opportunity Party on the cusp of the 5% threshold to make it into parliament after the November 7 election, its signature ” tax reset ” proposal deserves close attention.
Author
- Michael Fletcher
Adjunct Research Fellow, School of Government, Te Herenga Waka — Victoria University of Wellington
The policy is essentially a universal basic income (or “citizen’s income”), with a range of supplementary payments replacing current welfare benefits and NZ Super, funded by a land tax.
Opportunity presents its reset as a solution to New Zealand’s welfare problems. But is it really?
Most universal basic income (UBI) proposals fall down on two major design problems. They fail to provide enough income for all but the simplest household types. And they typically require implausibly high income tax rates to pay it.
Opportunity’s policy aims to get around the first problem by including additional payments on top of the UBI.
As well as an annual tax-free income of NZ$19,400 there would be add-ons for disability ($6,000), housing (average $6,500 for singles, $10,500 families), sole parents ($9,500), over-65s ($10,000 for singles, $5,250 for a couple) and children ($6,750 to $18,250 each, depending on age).
The package would replace all existing main benefits, NZ Super, the accommodation supplement, Working for Families tax credits, Best Start and paid parental leave.
The proposal gets around the second problem of higher income taxes by funding the UBI and add-ons with a tax on the unimproved value of land: 1.75% annually on urban land, and 0.5% on rural land.
This means only relatively minor tweaks to the income tax schedule would be needed. The top marginal tax rate of 39% would stay.
But there are drawbacks to both these solutions.
Little help for the poorest
Although Opportunity downplays it, much of the existing welfare apparatus would still be necessary.
True, there would be no work testing. But a range of other eligibility tests would continue: health status for the disability supplement; relationship status for the sole-parent add-on; cost verification for the housing allowance; and shared-care rules for the child allowances.
Moreover, all these add-ons are targeted, so would require income testing. Individually, the supplements may be justified. But collectively they raise an obvious question: if all this is needed, why bother with the UBI?
A second and more serious problem is that the proposal helps the worst off the least, namely beneficiaries on below-poverty-level incomes . To propose such a major change to the tax/benefit system and yet do so little to address welfare poverty suggests a blind spot around the biggest problems facing the current system.
This is highlighted in the graph below which compares Opportunity’s proposals with current policy for two family types: a single person alone, and a sole parent with one young (two-year-old) child.
The horizontal axis shows different levels of earnings from nil to $200,000. The vertical axis shows the household’s in-the-hand income after taking account of income taxes, benefits, the citizen’s income and add-ons.
For simplicity, the current accommodation supplement and Opportunity’s housing add-on are excluded. While the absolute values are different, the broad picture is the same for other household types.
For all annual gross incomes above about $20,000, both households are clearly better off under Opportunity’s proposal (before considering the land value tax).
The exact amount varies depending on income. But for earnings over about $30,000, these single-adult households would typically gain $11,000 or more – enough for a homeowner to pay land value tax on land worth up to around $650,000. The amount is considerably higher for couples because each person receives the citizen’s income.
However, gains from Opportunity’s plan are much smaller (and in some cases negative) for people with little or no market income – that is, all beneficiaries and many superannuitants. A single adult with no income gains just $27 a year – 52 cents a week.
If they supplemented their citizen’s income with a few hours’ work, they would actually be worse off than under current rules.
The situation is slightly better for the sole parent household in this example. If they had no other income, they would be $2,869 better off under the tax reset (less if they work a few hours on top of the UBI).
Again assuming no effect from the land value tax, a person on a disability benefit with no other income is between $3,324 better off and $984 worse off, depending on how much disability allowance they currently receive. A single superannuitant with no other income gains just $532 a year.
These effects seem intentional. Rather than prioritising poverty reduction, Opportunity’s citizen income package has been designed to more or less match current welfare payments, with the bigger gains higher up the income distribution.
Problems with a land value tax
The land value tax does have some positives. Land taxes are economically efficient and relatively hard to avoid, and a land value tax would be an incentive for more intensive land use.
Arguably, reducing New Zealand’s heavy reliance on income taxes and GST by switching some revenue gathering from income to wealth could also be seen as an advantage.
But there would be some serious losers.
Introducing the tax would almost certainly be associated with a large fall in land values. A significant number of homeowners could suddenly face the risk of negative equity.
Paying a tax bill that would likely be more than $10,000 annually on an average home would be near impossible for many superannuitants, beneficiaries and others.
There are ways to mitigate some of these problems. But even leaving the politics of taxation aside, implementing a new land tax would be fraught.
Perhaps the fundamental problem with Opportunity’s proposal is that it attempts to construct a UBI-based welfare system broadly within the current level of total tax revenue.
The result is a structure that does little for those at the bottom of the income distribution and yet retains many of the current targeting complexities.
An alternative UBI package could produce better outcomes for those relying on benefits. But that would require higher total tax revenue, making its political feasibility even less likely.
