Farrar illustrates WfF folly

Written By: - Date published: 9:02 am, March 4th, 2011 - 44 comments
Categories: dpf, families, same old national - Tags:

John Key has tidied up the confusion he caused yesterday and says that the quakes will cost the government $5 billion in rebuilding and $5 billion in lost revenue over the next 4 years. Big bikkies but easily covered by an emergency levy and canning the white elephant motorways. So, why are the Nats obsessed with tinkering with Working for Families?

As Zet pointed out yesterday, National has long made a song and dance about high income families getting WfF but before the 2008 election, they gave up on the policy because they learned that only 1,000 families with incomes above $100,000 get WfF and they only get $1,000 a year each on average. Such a small problem, if one concedes it’s a problem, is not worth the government and Parliament’s effort and the side-effects of trying to fix.

Apparently, thanks to inflation, there are now more families on more than $100,000 getting WfF but the total bill is still a meager $6 million. The Government spends more than that on BMWs without battering an eyelid, so why are the Nats rabbiting on about reforming WfF again?

David Farrar gives us an insight.

First, he concedes that taking WfF away from high income families without also taking it off low and middle income families is not easy. Then, he writes:

At present, familes (in work) receive WFF up to the following income bands:

  • 1 child – $75,317
  • 2 children – $91,227
  • 3 children – $107,137
  • 4 children – $126,947
  • 5 children – $146,757
  • 6 children – $166,567

It’s important to note that, at these incomes, families get no WfF, and they get only $4 a week for every $1,000 their income is below these marks.  – eg. a 3 child family on $100,000 (2 adults in full time work on the average wage) gets only $28 a week.

“What I would consider is increasing the abatement rate from 20% to 25% just for those earning over $70,000 a year. You see National dropped the top tax rate from 39% to 33% (something Labour vows to reverse)for those earning over $70k year so the EMTR would still be slightly lower than it was under the last Government if they are a sole income family.

Now one could say is there any point in reducing the top tax rate by 6% and increasing the WFF abatement rate by 5%. Well yes there is. It is better to have a lower tax rate and not pay a relatively wealthy family welfare, then have higher tax rates and higher welfare payments. Tax churn is inefficent and wasteful.

So what would an extra 5% abatement do for WFF maximum incomes? They would be:

  • 1 child – $75,317 to $74K
  • 2 children – $91,227 to $87K
  • 3 children – $107,137 to $99K
  • 4 children – $126,947 to $115K
  • 5 children – $146,757 to $131K
  • 6 children – $166,567 to $147K”

First thing – these aren’t exactly dramatic reductions eh? I mean, if you’re fretting that a 5 child family on $125K a year can get $8 a week in WfF, are you going to stop fretting when only a 5 child family on $113K can get it?

Now, Farrar’s increased abatement rate kicks in at $70,000. What’s the median income for families with dependent kids? $70,000. So this isn’t ‘rich’ when you’re talking about a household – it’s 1 parent on the average wage, the other in the minimum wage. And it puts these parents’ effective marginal tax rates up above what they were when National was elected (from 41% to 42.5%). Farrar tries to confuse the issue by conflating individual and household incomes.

But let’s follow through the logic of Farrar’s numbers. How much money would actually be saved?

As a rough estimate, fuck all. A 3 kid family on $99,000 was getting $32 a week and is now getting nothing – annual saving, $1,500. A 1 child family on $74,000 goes from getting $4 a week to getting nothing, $200 a year. Those are the maximum savings for those family sizes, if the family earns either more or less, the savings from changing the abatement rate would be smaller.

We don’t have exact numbers on how many families would be affected but you can see it’s pretty small beer – how many 1 child families earn between $70,000 and $75,000 and would get, at most, $200 a year shaved off their WfF? How many 3 child families earn between $70,000 and $107,000 and would lose up to $1,500? How many larger families are there anyway, and how many of those fall in the necessary income bands?

This is no great money saver and it comes at the cost of putting up effective tax on middle income Kiwis who have already seen their wages stagnate while GST and petrol prices eat up their meager tax cuts and more.

The solution to filling the hole in the government’s books isn’t fiddling around with WfF, generating a lot of small but hurtful income cuts for middle income families. The solution is to ask high income earners to give back the massive tax cuts they have received from National cutting the top tax rate from 39% to 33% and to stop wasting money on motorways that were already uneconomical even before this latest oil shock.

What can we conclude by National’s obsession with shaving WfF and their refusal to look at an emergency levy other than that they want to keep the massive tax cuts they have given themselves while playing scrooge on working families?

44 comments on “Farrar illustrates WfF folly”

  1. ianmac 1

    I seem to remember Michael Cullen saying back then that it was not worth the money to cut off higher income WFF? The bureaucracy would exceed the return.
    We might suspect that the suggestions about WFF from Mr Key might be a feint. Like throwing a few scraps to the chooks to fight over while the nests are robbed.

  2. Tigger 2

    Would love to know what generating all these scenarios and projections is costing in labour for those wasteful back office layabouts. Further proof the public sector needs to be gutted!

  3. Any benefit of WfF is that it targets families for receiving tax credits. People without families do not qualify. So the tax paid by non-families remains at the usual levels. Reducing entitlement for WfF is – effectively – a tax INCREASE…and it’s a tax increase that specifically targets families who earn the least.

    Better to cancel motorways and improve public transport….but the National Party is clearly incapable of seeing that (or at least….following that path). Trying to talk to Tau Henare, for example, about Peak Oil is equivalent in his view to discussing alien invasion. Those were his words, not mine.

    Evidence be damned. IEA Report 2010 – irrelevant. Can’t be bothered.

    So we need a different government in the short term…and the National Party needs to free itself from the increasingly bizarre American ‘conservative’ ideology that has corrupted National’s thinking and blinded it to the staringly obvious.

  4. tsmithfield 4

    “The solution is to ask high income earners to give back the massive tax cuts they have received from National cutting the top tax rate from 39% to 33% and to stop wasting money on motorways that were already uneconomical even before this latest oil shock.”

    Firstly, the 39% top tax rate was a stupid idea in the first place. Many in that bracket are company owners who would simply ensure any income that put them over the threshold was taxed at the lower company rate. Very hard to legislate against this, because companies could have lots of arguable reasons to put up for retaining profits in the company. If fiddling with WFF is stupid because it gains very little, then the same argument applies to reinstating stupidity with the 39% tax rate.

    Secondly, agree that infrastructure spending such as roads could be looked at.

    • RedLogix 4.1

      Many in that bracket are company owners who would simply ensure any income that put them over the threshold was taxed at the lower company rate.

      Again I ask you the same question as I did yesterday. I can understand why arguing that aligning the top tax rate and the company rate makes sense to you… I still think it amounts to rewarding cheats… but lets go with your position for a moment.

      What then is your justification for the govt then planning to lower the company tax rate to 28% in 2012… restoring almost exactly the same incentive to cheat as before?

      • Bright Red 4.1.1

        lolz

      • Colonial Viper 4.1.2

        My 2c worth…its a race to the bottom of the barrel…next step will be to argue that the top income tax rate needs to be realigned to prevent tax avoidance…this time down to 28% of course.

      • tsmithfield 4.1.3

        “I can understand why arguing that aligning the top tax rate and the company rate makes sense to you… I still think it amounts to rewarding cheats… but lets go with your position for a moment.”

        I don’t see it as cheating. Just paying the minimum amount that is legally required.

        “What then is your justification for the govt then planning to lower the company tax rate to 28% in 2012… restoring almost exactly the same incentive to cheat as before?”

        Yes. I agree with you. The flatter the tax system the better, so National moving away from this ideal by going for a 28% tax rate.

        • RedLogix 4.1.3.1

          I don’t see it as cheating. Just paying the minimum amount that is legally required.

          Think about it. What possible reason would a company owner have to ‘leave profit in the business’ rather than take it out as personal income? Apart from ‘minimising tax’ that is? If that cash is being used to develop the company, well and good.

          But if the cash was simply being spent on items that really amount to a personal benefit to the owner (like a flash company boat for example), and FBT was not being properly applied…. then how is that not ‘cheating’?

          so National moving away from this ideal by going for a 28% tax rate.

          Well fair enough… but surely the 28% company tax rate pretty much demolishes English’s spin on this. Really it had nothing to do with eliminating the incentive to mimimise tax…. it was just a naked tax cut for the rich.

          He just couldn’t say that.

          • tsmithfield 4.1.3.1.1

            “What possible reason would a company owner have to ‘leave profit in the business’ rather than take it out as personal income?”

            Lots of reasons. For instance:

            Money kept in the company to fund future growth.
            Money kept in the company to meet bank equity requirements.

            “Well fair enough… but surely the 28% company tax rate pretty much demolishes English’s spin on this. Really it had nothing to do with eliminating the incentive to mimimise tax…. it was just a naked tax cut for the rich.”

            I remember English saying that he wasn’t concerned about the incentive to keep money in companies because that is good for business growth etc. Also, I understand the adjustment to the tax rates is part of a long-term strategy to move towards a flatter tax system, so it doesn’t mean that tax rates won’t eventually be aligned.

            As I said, I agree with you though. I would actually prefer a tax system that is totally consumption based (e.g. totally GST). This would be impossible to avoid, very efficient, and save a lot of money that is otherwise wasted in churn.

            That would be a tax system that is as flat and efficient as possible.

            • RedLogix 4.1.3.1.1.1

              Interesting.. once we define our terms properly it turns out we aren’t so far apart. I’m inclined to agree that a fully consumption based tax would make a lot of sense technically, but it would be awfully regressive.

              But at that point you’d want to have a think about the fact that currently all financial transactions are zero-rated for GST. That might skew things quite a bit.

              Just an interesting curve ball for you. How about this? If one could ensure that all FBT was properly applied… why have a company tax at all?

              • tsmithfield

                Actually, I quite like the idea of some sort of transaction tax as that would spread the burden more fairly and simplify the system even further.

                I can’t remember, was it you who was arguing for a guaranteed minimum income? Because I think that idea combined with a completely consumption based tax system would be the ultimate of simplicity and efficiency. The size of IRD and WINZ would probably shrink by 90% as would the number of people employed as accountants!

                Don’t like the FBT idea because that provides just another layer requiring enforcement. I prefer the KISS principle.

            • Lanthanide 4.1.3.1.1.2

              “Lots of reasons. For instance:

              Money kept in the company to fund future growth.
              Money kept in the company to meet bank equity requirements. ”

              Yes, but essentially what you’re suggesting here is that because the company rate has dropped to 30% from 33%, and will soon be dropping to 28%, people are saying “well, instead of paying myself this money as a dividend, instead I’m going to keep it in the company to grow it or for bank requirements”. As if somehow being taxed less suddenly makes someone do something else with the money they now had?

              If you were going to give $67 company money to yourself, but now instead the figure has increased to $70 you decide instead to leave it in the company? Similarly if you were already going to leave $67 in the company, then surely you’d be more likely to skim that extra $3 off for yourself because ‘your company wouldn’t miss it anyway’?

              • tsmithfield

                I agree that people might have motivations for making these decisions than what they state in their company minutes. But from an enforcement and legislative perspective it becomes very murky trying to prove the decisions were made specifically for avoidance.

            • Draco T Bastard 4.1.3.1.1.3

              This would be impossible to avoid,

              Except that it’s possible for some to avoid it. As I said the other day, if you have an office at home a home air conditioning unit (well, heat pump anyway) is 100% tax deductible so no GST on that.

              • tsmithfield

                True. But this would generally apply to one-person businesses operating from home who probably need a few advantages anyway. 🙂

                • Draco T Bastard

                  It’s still a tax dodge.

                  • Lanthanide

                    Yeah, I would suggest a big incentive for going into a home business like that, which don’t tend to be amazingly profitable (eg, never profitable enough to hire an employee) is simply to get tax deductions on things you’d be buying anyway, like your electricity bill, your rates and your insurance.

                    This would especially be the case if you weren’t relying on the home business as the sole family income – husband goes to work and gets a salary, wife stays home and potters around in her ‘business’ that is more of a hobby for 15/hours a week, makes $15k in profit per year but gets $5k in tax writeoffs while doing it. This is essentially what my parents did for most of my childhood – although for my mother it really was a very hard-work business that took more time than 15hrs on average, and I don’t believe she abused the tax deductions at all (like buying a heatpump for example).

                    • Armchair Critic

                      I would suggest a big incentive for going into a home business like that…is simply to get tax deductions on things you’d be buying anyway…
                      I would suggest you are wrong.
                      I would say its to:
                      avoid commuting, and the office environment,
                      to get every dollar you earn, rather than have it going to some faceless shareholder,
                      to have flexibility around the work you do and when you do it
                      or, at least, that’s why I did it.
                      If your main reason for starting a home business is to do with tax then you aren’t really focussing on what your business is about. Or you’re setting yourself up to fail.

                    • Draco T Bastard

                      My biggest problem isn’t that a heat pump (and other stuff) can be written off if you happen to be a business working from home but that employees, who really are operating a business, don’t have those same write-offs available to them.

                      Now a number of people are going to say that they can all go on contract, which they can and something that I’ve said before, but doing so has a number of disadvantages and barriers:
                      1.) Loss of statutory rights/protections
                      2.) Expense. Although cheap and easy to register a business in NZ the costs (re software/accountants) involved are beyond what most people can afford
                      3.) Knowledge. Most people just haven’t got a clue as to how to set up a business and don’t know where to go to get that knowledge
                      4.) Accountant – the present system, if everyone became a business, would turn us into a nation of accountants 😛

    • Bright Red 4.2

      “Firstly, the 39% top tax rate was a stupid idea in the first place. Many in that bracket are company owners who would simply ensure any income that put them over the threshold was taxed at the lower company rate. Very hard to legislate against this, because companies could have lots of arguable reasons to put up for retaining profits in the company. If fiddling with WFF is stupid because it gains very little, then the same argument applies to reinstating stupidity with the 39% tax rate.”

      Are you denying that the 39% rate brought in significantly more revenue than the 33% rate does?

      Funny, because Treasury disagrees. http://treasury.govt.nz/government/revenue/estimatesrevenueeffects/estimates/index.htm

      Each cent off that top rate meant $140 million less revenue. So a 6 cent reduction has cost nearly a billion.

      All the Left is saying is ‘temporarily restore the top tax rate to where it was just two years ago’. The world didn’t end when we had a 39% rate for 9 years, nor did it end when the top tax rate was over 60% for all but 6 years between 1960 and 1986. The rich will still be rich with the old top tax rate back.

      • Colonial Viper 4.2.1

        Land tax and CGT please. (Beating up on PAYE earners is overrated, although the system should be made more progressive taking into account those who are on 5x and 20x the median income.)

        Or simply increase GST as applied to rates, as an interim measure.

      • tsmithfield 4.2.2

        “Funny, because Treasury disagrees. http://treasury.govt.nz/government/revenue/estimatesrevenueeffects/estimates/index.htm

        Each cent off that top rate meant $140 million less revenue. So a 6 cent reduction has cost nearly a billion.”

        Fair point.

        A couple of things in response.

        Firstly, those who benefited from the removal of the 39% rate will be paying a numerically a lot more in GST due to the fact they have a lot more to spend than other groups. So, this would have offset the income lost from the tax change.

        Secondly, I don’t think there would be a straight line loss from 33 to 39. This is because the incentive to avoid the tax would increase for each cent the tax rate exceeds the company rate. Thus I would expect a decreasing marginal return for rate increases.

        • Bill Browne 4.2.2.1

          I carefully calculated the difference between the tax I was paying before and the additional GST I would be paying and carefully squirrel that amount away in the bank every month.

          I plan to spend it on an overseas trip later this year.

          • tsmithfield 4.2.2.1.1

            Fair enough. I guess you will be paying increased GST on the air fares though.

            • Lanthanide 4.2.2.1.1.1

              On an overseas trip where you need to stay in accommodation for longer than a week or so, generally the airfares will start to become a minor part of the cost.

            • Bill Browne 4.2.2.1.1.2

              No GST on international airfares 🙂

              It’s all win!

              I’m going to spend what I saved on hookers and blow while I’m overseas.

              • Colonial Viper

                lolz, now just frame it as a business trip and those hookers as “personal business consultants” and the rest of us will happily pick up the tab.

        • Draco T Bastard 4.2.2.2

          Firstly, those who benefited from the removal of the 39% rate will be paying a numerically a lot more in GST due to the fact they have a lot more to spend than other groups. So, this would have offset the income lost from the tax change.

          Just because they have more to spend doesn’t mean that they will spend it. In fact, people who have discretionary income tend not to spend it but to save it and so, no, the loss won’t be offset by GST and that’s even after the GST increase.

    • Rosy 4.3

      Some people in the top tax brackets would aviod paying whether the tax rates are aligned or not. In some ways it’s not about the money, it’s about the notion of paying tax.

    • Lanthanide 4.4

      “Very hard to legislate against this, because companies could have lots of arguable reasons to put up for retaining profits in the company”

      I guess you missed the court case last year about two doctors, I believe from Christchurch, that were paying themselves salaries of under $60k and getting the rest of their income via their company, effectively using the loophole you’re talking about here. IRD pursued them in court and won on the basis of evading tax because they should have been receiving salaries of approx $230k and paying 39% tax on that, and won at appeal I believe too. I think there are more appeals being tried, and the “tax advisory” industry is up and arms about the outcomes from the case.

      So yes, while it might be hard to legislate against it, we thankfully have these things called “courts” that can use common sense to see when the law is being twisted for personal gain.

      • tsmithfield 4.4.1

        Yeah. I know about that. Not what I was getting at though.

        I am thinking more about arguments such as retaining profits to grow the company, keeping money in the company for bank equity requirements etc etc. There are so many variables such as this that could be used as justification for keeping the money in the company to be taxed at a lower rate that would be very difficult to argue against.

        • Lanthanide 4.4.1.1

          And, if the money is actually kept in the company and not later given to the owners of the company as an under-the-table salary, then I don’t think anyone has a problem with that.

    • Ari 4.5

      TS: People putting income back into their companies and spending it is exactly what we want- this is why the top tax rates should be higher than the corporate tax rate- to encourage people investing that extra money rather than spending it all on luxury items produced abroad or saving it.

      • tsmithfield 4.5.1

        I see your point. In fact, I think that was a reason English raised as to why he was not concerned about the company rate going down to 28%.

        The counter to that is that it is unfair on the high earning PAYE workers who don’t have the capacity to structure their affairs to avoid the higher rate.

        • Draco T Bastard 4.5.1.1

          Now that’s something I agree with – people on PAYE are really badly screwed by the present tax system. They get double taxed on their work expenses and they can’t do anything about it. This is another reason why I want a UI and to shift everybody onto the same set of rules. The multiple rule sets that we have now is, IMO, the major source of tax loopholes that allow some people to avoid paying taxes.

      • Lanthanide 4.5.2

        The point is that they keep the money in the company as ‘retained earnings’ and then take it as a dividend or other disbursement from the company. In other words they get money in their back pocket out of the company, but it was taxed at the company rate of 30% instead of 39%.

        It’s a salary in everything but name and tax liability.

        • Colonial Viper 4.5.2.1

          Dividends received need to be accounted for as personal income unless there are attached imputation credits from the company.

          • Lanthanide 4.5.2.1.1

            Yeah, I’m hazy on the specifics as I’ve never done it myself. But I know the principal behind it and that it is possible in a fairly straightforward manner.

  5. randal 5

    the thing about national is they cant stand anyone getting money that they consider to be theirs.

  6. Draco T Bastard 6

    You see National dropped the top tax rate from 39% to 33% (something Labour vows to reverse)for those earning over $70k…

    And that would be DPF lying outright as he knows full well that Labour promised no such thing. What Labour have proposed is another tax bracket in the 6 figure income range.

    A second source of funds to allow us to create a tax free zone will be to claim back some of the windfall tax cuts from the very top income earners.

    We haven’t yet set a new top tax rate.

    Nor have we determined the level of income that it will apply to. But it will only affect incomes comfortably into six figures, the top few per cent of earners.

  7. I suspect that some of the liable parents are swindling child support payments like they are swindling IRD in paying business tax.

    • Vicky32 7.1

      Oh that’s almost certain… (I had a rich ex, and no question he was doing that.) Because I was on DPB it was all irrelevant to me, I never saw a cent of it., but he paid the minimum. If he’d paid what he was supposed to, I’d actually have got some of it!
      Deb

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