Why We Need Universalism, Not Tax Cuts, To Solve The Cost-Of-Living Crisis

Written By: - Date published: 8:24 am, June 1st, 2023 - 64 comments
Categories: benefits, budget 2023, cost of living, equality, inequality, tax, welfare - Tags: , , ,


In recent years, many people in Aotearoa – New Zealand have been struggling with the rising costs of living, especially in areas such as housing, health care, education, and transport. These costs have outpaced the growth of wages and incomes, making it harder for people to afford their basic needs and aspirations and many of us are feeling the pinch. This has led to a widespread sense of frustration and dissatisfaction among the population, and to a demand for policy solutions that can address this crisis. Arguably, the Government has made only small steps towards this in Budget-2023 that will only alleviate the economic pressures for some but certainly not all people – there was not enough fiscal wriggle room to please everyone.

Some politicians and pundits say that tax cuts are the answer. They argue that tax cuts can stimulate economic growth, increase disposable income, and reduce government intervention. They claim that tax cuts can benefit everyone, especially the middle class who are feeling the squeeze of the cost-of-living crisis. Obviously, there is some truth in their claims.

But tax cuts may not be the best solution for this problem. In fact, tax cuts may have negative effects on two important values that underpin a fair and prosperous society: inequality and universalism.

Inequality is the gap between the rich and the poor, or how income and wealth are distributed in a society. Universalism is the extent to which social benefits are available to all citizens regardless of their income or other factors.

Sam Sachdeva wrote (https://www.newsroom.co.nz/8things/budget-2023-hipkins-pragmatic-push-puts-national-in-tight-spot) that Chris Hipkins is continuing with Labour’s inclination towards universalism in entitlements.

Inequality and universalism are closely related to each other, and they are influenced by the design and implementation of welfare policies. Welfare policies can be either universal or targeted. Universal welfare policies provide social benefits to all citizens regardless of their income or other criteria. Targeted welfare policies provide social benefits only to the poor or the neediest groups based on means testing or other criteria. One might think that targeted welfare policies are more effective and efficient in reducing poverty and inequality than universal welfare policies. After all, targeting the poor means that more resources are directed to those who need them the most, right?

Wrong!

This is where the paradox of redistribution comes in. The paradox of redistribution is a concept that was proposed by two Swedish scholars, Walter Korpi and Joakim Palme, in a famous paper published in 1998 (https://www.econstor.eu/bitstream/10419/160846/1/lis-wps-174.pdf).1 They argued that welfare states that target social benefits exclusively at the poor tend to achieve less redistribution and reduce less income inequality and poverty than welfare states that provide universal social benefits to all citizens.

This may seem counterintuitive, but Korpi and Palme explained that targeting the poor has several drawbacks that undermine its redistributive potential. For example:

  • Targeting the poor may reduce the size of the redistributive budget, as it may generate less public support and political legitimacy for social spending, especially among the middle and upper classes who do not benefit from it.
  • Targeting the poor may increase the administrative costs and complexity of delivering social benefits, as it may require more means testing, monitoring, and verification procedures to identify and reach the eligible recipients. This also puts a burden on the recipients to provide accurate and up-to-date data to the appropriate agencies & departments often with a threat of punitive measures.
  • Targeting the poor may create disincentives and stigma for the recipients of social benefits, as it may reduce their work incentives, erode their social rights, and expose them to social discrimination and exclusion. For example, the ‘social investment’ proposal by Bill English that was criticised for this (https://www.beehive.govt.nz/speech/launch-‘social-investment-new-zealand-policy-experiment’).

On the other hand, universal social benefits have several advantages that enhance their redistributive potential. For example:

  • Universal social benefits may increase the size of the redistributive budget, as they may generate more public support and political legitimacy for social spending, also among the middle and upper classes who also benefit from it.
  • Universal social benefits may reduce the administrative costs and complexity of delivering social benefits, as they may require less means testing, monitoring, and verification procedures.
  • Universal social benefits may create incentives and dignity for the recipients of social benefits, as they may increase their work incentives, strengthen their social rights, and promote their social integration and inclusion.

Based on these arguments, Korpi and Palme concluded that universalism is a more effective strategy of equality than targeting. However, there have been subsequent challenges of Korpi and Palme’s paradox, mostly in academic circles. It is a relevant and important topic that has implications for policy design and evaluation in New Zealand.

Indeed, as Sam Sachdeva wrote:

Helpfully, universal benefits are also easier to sell to the wider population, and more difficult to scrap.

There are examples, of course, that show that New Zealand’s version of universalism has not achieved equity of outcomes for all, and that targeting has often been associated with negative consequences. Moreover, New Zealand’s tax system has also been criticised for being regressive and favouring wealth accumulation over income generation. Thomas Piketty, a renowned economist who has been advocating reforms to combat inequality, argues that inequality is bad for economic prosperity, as it undermines social cohesion, democratic participation, and human development.

So, what does this mean for tax cuts?

Tax cuts are often seen as a way to stimulate economic growth, increase disposable income, and reduce government intervention & interference. However, tax cuts may also have negative effects on inequality and universalism, such as:

  • Tax cuts may reduce the revenue available for social spending, which may lead to lower coverage and generosity of social benefits, or higher public debt.
  • Tax cuts may benefit the rich more than the poor, as they may be based on income brackets, tax deductions, or tax credits that favour higher earners.
  • Tax cuts may undermine the public support and political legitimacy for universal social benefits, as they may create a perception that everyone should pay less and receive less from the government. This seems the core NACT reasoning and argument (or excuse?) for their political existence. (NB certainly ACT is cosying up in bed with The Taxpayers’ Union and National regularly joins them for a threesome)

Therefore, tax cuts may not be the best solution for addressing the cost-of-living crisis or improving the well-being of the population. Rather, it may be more effective and fair to invest in universal social benefits that can provide adequate and accessible support to all citizens, especially those who are most vulnerable or disadvantaged.

Of course, this does not mean that universalism is always superior to targeting or that tax cuts are always negative. There may be situations where targeting or tax cuts are justified or necessary depending on context or specific objectives. However, the point is to recognise pros & cons, have a constructive debate about it, and make informed & balanced decisions based on evidence, values, and principles that we, or most of us, can subscribe to and get behind.

This is why universalism matters. Universalism is not only a moral principle or an ethical ideal. It is also a practical strategy or an effective tool for achieving greater equality & well-being in society. It is not a Utopian dream or an unrealistic goal but a realistic possibility and an achievable outcome.

Universalism is not only good for you; it is good for everyone!

1In footnote 30: “In New Zealand private savings for old age in the form of home ownership has been encouraged (Davidson 1994).”

64 comments on “Why We Need Universalism, Not Tax Cuts, To Solve The Cost-Of-Living Crisis ”

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  1. mikesh 1
    1 June 2023 at 9:15 am

    In the 2020 election campaign TOP advocated a UBI of $250 p/w ($13,000 p/y), and a flat tax rate of 33c/dollar. Both measures seemed fair: the UBI because every adult would be receiving it, and the flat tax because it would have applied to all income from any source. However, such an arrangement would mean that anyone earning less than $39,000 in income would effectively have been on a negative tax rate – tax at 33c per dollar on $39,000 is exactly $13,000.

  2. Ad 2
    1 June 2023 at 9:38 am

    Australians pay no tax on their first $18,200 earned and it seems to work much more efficiently as a system than the government taking it as tax and then redistributing it.

    They also have GST set at 10% which is a whole bunch less regressive than our at 15%.

    Our most universally applied benefit is NZSuper. Any citizen can imagine how much better off they would be if their first NZSuper $18,000 were tax free, going to 1.4 million people.

  3. dv 3
    1 June 2023 at 9:56 am

    AND also a transaction tax of say somewhere around 0.1% on all bank transactions/ turnover.

    What would that raise?

  4. UncookedSelachimorpha 4
    1 June 2023 at 11:41 am

    Excellent post. More universalism please!

    Poorer people are the (vast) majority in unequal societies, so universalism will naturally move wealth towards the poor.

    I've noticed lately that the right wing are very keen on targeting and means testing. Sounds reasonable on the surface, but the main outcome is to allow the wealthy to not contribute to society.

    • tWiggle 4.1
      1 June 2023 at 8:03 pm

      Reading a biography of our most astute and most moral politician, Joe Savage, he was adamant on the idea of universal benefit entitlement.

      As a swagman on the road in the 1880's Depression in Victoria, I think, when unemployement for men was 40%, he said he found means testing of benefits to give rise to terrible inequities. He gave the example of an old woman and her orphaned granddaughter having to sell their home and use that money to live, where a small benefit would have tided them over until the economic situation improved, and kept them in their own home.

      And he commented on the demeaning sense of applying continually for a handout from the State, having to prove you are one of the 'deserving poor'.

      He was also canny about universal benefits having universal electoral support. His government specifically dated the start of newer benefits to the April after the 1938 elections, to ensure a second Labour term.

      We need to keep reminding newer generations and newer migrants of Savage's legacy of universalist economics, and its societal value. I personally took my son to Savage’s fey mausoleum overlooking the Waitemata harbour and gave him the talk.

    • Patricia Bremner 4.2
      2 June 2023 at 9:25 am

      100% agree.smiley

  5. roy cartland 5
    1 June 2023 at 11:45 am

    The Germans have a concept that roughly translates to "greed brake", that limits high incomes from getting ridiculous, where anything above the threshold is returned to the state. Yes just a tax bracket, but what an honest term for it.

  6. SPC 6
    1 June 2023 at 1:56 pm

    It is the why of public education and health and the former policy of a property owning democracy (where most would be able to own before retirement) or the availability of income related housing*.

    We've yet to extend ACC to end poverty for those in sickness or with disability* (free prescriptions help as does improved Pharmac funding – which actually lowers subsequent health costs and makes employment possible).

    This also covers healthy food in low decile schools and use of home gardens to supply them and or community food banks.

    However in the neo-liberal economic society has emerged a class apart – home owners who holiday abroad, use private schools and have health insurance and income insurance and anticipate a rental and or air bnb holiday home once they get their next tax cut.

    There was a division between two income parent families and sole parent families on the DPB (now mitigated by the WFF tax credits and the support for those with children under 5). Further action would be to allow the non working partner to get access to the dole* – work tested as per the DPB (also allows those on benefits to develop relationships with those who are working). Afforded by making it means tested at first (and it would reduce demand on housing).

    There is also a need to reach out to the middle class with tax reform – tax revenue neutral changes (wealth tax and estate tax and higher top income tax rates). That would enable lowering the income tax on most and*(then bring in CGT and land taxes to sustain the public delivery of services and improve infrastructure).

  7. Craig H 7
    1 June 2023 at 2:44 pm

    More progressive taxes and universal services is one model and flatter taxes and targeted services is another model. We're the latter, Scandinavian countries are mostly the former. I'm definitely keen to see NZ move away from our current model to a more universal service approach.

  8. Stuart Munro 8
    1 June 2023 at 5:26 pm

    The arguments that underwrote the last thirty years of neoliberal fantasy were largely that 'lowering tax takes will grow the pie and increase society's wealth over all'. This has been comprehensively debunked in practice. It's time to try something that actually works.

    • PsyclingLeft.Always 8.1
      1 June 2023 at 6:18 pm

      And that outright lie of the "trickle down effect" . Nact in NZ and the right wing world wide are still trying their utmost to spin it..

      However..

      five decades of tax cuts in 18 wealthy nations and found they consistently benefited the wealthy but had no meaningful effect on unemployment or economic growth.

      https://www.washingtonpost.com/business/2020/12/23/tax-cuts-rich-trickle-down/

      • Stuart Munro 8.1.1
        1 June 2023 at 6:22 pm

        Mmm – I have a feeling that the policy is not inherently impossible – but it requires governments that pursue it to be both scrupulous and rigorous in preventing the growth of inequality. They simply did not live up to the required standards.

        • PsyclingLeft.Always 8.1.1.1
          1 June 2023 at 7:00 pm

          it requires governments that pursue it to be both scrupulous and rigorous in preventing the growth of inequality.

          Therein the flaw. And yes if only….but was never gonna happen.

          There is this?

          “The solution is taxing wealth and excess profits and using that money to help people. This makes the most sense in the context of the approximately trillion-dollar wealth transfer to the wealthiest throughout COVID-19.

          https://www.greens.org.nz/persistent_inflation_shows_urgent_need_to_tax_wealth

          Of course there are (apparently) so many reasons NOT to do that ?…..

          I do know that IMO Nact would screw NZ…..

          • Ngungukai 8.1.1.1.1
            1 June 2023 at 7:47 pm

            We need a Government that is going to look at Tax logically, and aim at an equitable distribution of wealth.

      • Thinker 8.1.2
        1 June 2023 at 8:25 pm

        Funny how the parties that advocate for less government don't seem to advocate for less politicians or cutting the cost of running parliament…

    • Ngungukai 8.2
      1 June 2023 at 7:48 pm

      Neoliberal Con.

      • Stuart Munro 8.2.1
        1 June 2023 at 9:27 pm

        Partly perhaps.

        But equally, a damning indictment of the weak and corruptible MPs that allowed the wholesale theft of public assets, and the weakening or removal of the prudent regulations that once constrained the incontinent greed of our lazy, parasitical, exploiter classes.

        Been in politics in the last few decades? Hang your head in shame.

  9. Mike the Lefty 9
    2 June 2023 at 8:46 am

    One of the measures we need is a Financial Activities Tax (FAT) so the banks that have been making obscene profits at the expense of New Zealanders have to pay some of it back.

  10. Corey 10
    2 June 2023 at 11:10 am

    I totally agree universalism is the answer, not just because it's extremely electorally popular (so the left should try it more) which means they almost never get rolled back, but also because they do the most good.

    Universal dental for example is a program NZ desperately needs, would ease so much suffering and disease in NZ, would be a hugely popular program and cement whoever innacted it's legacy up there with Savage and Fraser.

    It's relatively cheap, other nations health systems fund it and most kiwis wouldn't mind tax creep as much if the extra revenue was being used to fund things like universal dental, because it would really help everyone.

    We're never going to get programs like that under the modern Labour party which has long jettisoned social democracy for watered down, mild liberalism.

    Since Labour have no interest in universalism, I support tax cuts that benefit the poorest the most.

    Get rid of gst off food or at least cut it down to 10%, personally I favor getting rid of the goods and just having a services tax.

    Adjust the tax brackets for inflation, especially for minimum and lower to middle income earners.

    First $20 k tax free (if UK and Canada can do it)

    Allow beneficiaries to claim a tax return or remove the taxes from their benefits, if they are paying tax and can go on their mymsd app and see the tax deductions from their benefits, they deserve a tax return.

    • Descendant Of Smith 10.1
      2 June 2023 at 12:02 pm

      Benefits were once tax free. Ruth and her ilk made them taxable so some of the cost could be clawed back through the higher tax brackets that would apply for those who worked for part of the year. In effect it made worse-off the most vulnerable eg seasonal workers.

      When tax rates are reduced though the net benefit stayed the same – unlike NZS whose gross super stayed the same – so those on benefits never ever benefited from tax cuts.

      Making benefits tax free again would help those in precarious employment like seasonal work.

      • Phillip ure 10.1.1
        2 June 2023 at 12:27 pm

        Just one of the creators of the widespread poverty we have..created by douglas/richardson/shipley etc all..

        Poverty-creators that gutless neoliberal labour leaders/govts since then have failed to roll back…

        Labour and national:.. kicking the crap out of the weakest/poorest..ever since that glorious neolibral revolution of the 1980's..

        A pox on all of them…!

        • Descendant Of Smith 10.1.1.1
          2 June 2023 at 1:32 pm

          Yeah Helen Clark took the opportunity to kick those on benefit when she put $20-00 back on super but not on benefits, Jacinda Adern kicked them even harder when she had the most popular support ever in this country to help our poorest and could have outright implemented the WEAG recommendations and chose not to.

          • Phillip ure 10.1.1.1.1
            2 June 2023 at 4:15 pm

            Agree with the indictment of ardern…

            On how she utterly failed to do what she promised…

            When she had in her hands the (majority) power to make good on those promises..

            Around poverty/homelessness/child-poverty…the environment..

            An epic fail..that kind of defines her/that labour (in name only) government…

    • Incognito 10.2
      2 June 2023 at 9:46 pm

      Children in New Zealand who meet the eligibility criteria for publicly funded health and disability services are entitled to free basic oral health services from birth to 17 years of age (until their 18th birthday).

      https://www.health.govt.nz/your-health/services-and-support/health-care-services/visiting-dentist/publicly-funded-dental-care

      Which countries have universal free dental Care?

      How much would this cost in NZ?

      • miravox 10.2.1
        2 June 2023 at 10:23 pm

        Yeah, a big problem for kids is access to routine dental care – just not enough dentists/dental nurses to go round.

        "Which countries have universal free dental Care?"

        Austria for starters, along with several other European social democractic countries. Although to be accurate I had to pay a 5 euro fee for x-rays when I had to get a total rebuild of a broken tooth when I lived there. I think that was on the grounds that in this case the x-ray wasn't medically necessary but the repair was.

        "How much would this cost in NZ?"

        I don't know – clearly not cheap (hence the 'medically necessary' rule)

        https://www.workinaustria.com/en/living-working/social-welfare-and-health-system-in-austria/

        Austria’s social services such as minimum benefits as well as social insurance and pension benefits contribute to a very high level of social security for the country’s inhabitants. Together with France, Belgium, Denmark, Finland, Germany, Italy and Sweden, Austria ranks among the eight countries investing more than one quarter of their gross domestic product in social expenditures. This is clearly higher than the OECD average of 20.1 percent.

        The taxes (social insurance is collected in your wage taxes) are obviously higher than NZ, but as you argue in this post, help create a much more equitable society.

        Excellent post, by the way. Thanks for writing it.

        • Phillip ure 10.2.1.1
          3 June 2023 at 11:24 am

          What percentage of gdp does nz spend on social services..?

          • arkie 10.2.1.1.1
            3 June 2023 at 11:47 am

            The OECD reports as of 2022, New Zealand's public spending as a percentage of GDP is 20.8%, lower than the 2022 OECD average of 21.1%

            https://www.oecd.org/social/expenditure.htm

            • Incognito 10.2.1.1.1.1
              3 June 2023 at 12:24 pm

              For NZ the reported figure is for 2021.

            • Phillip ure 10.2.1.1.1.2
              3 June 2023 at 3:20 pm

              @ arkie..

              Thanks for that..

              So not much down on the oecd average…

              But those with the dignity of/afforded by strong social support for their citizens spend 25%..that is clearly where we should be…

        • Belladonna 10.2.1.2
          3 June 2023 at 1:12 pm

          Robertson estimated over 1 billion p/a last time this came up.

          https://www.rnz.co.nz/news/political/478762/single-step-move-to-universal-dental-care-cost-prohibitive-grant-robertson

          Of course, it's only a wild estimate – we actually have no idea what the unmet dental need is….

          • miravox 10.2.1.2.1
            3 June 2023 at 2:23 pm

            I can see the point about the cost of a one-step move to universal dental coverage, on the otherhand the reduction in inflammatory disease that is linked to poor dental health (peridontal inflammation in particular) could have a huge positive impact on the health system and disability and associated social costs.

            • Belladonna 10.2.1.2.1.1
              3 June 2023 at 2:36 pm

              Oh, I agree. If (and it's a very big if) there were the dentists available. There aren't.
              Dental treatment at hospitals is free – but is only available for the very worst cases – and by that time you already have the associated health issues. It's also very, very hit and miss – and the first thing cancelled when hospitals are under stress – as they are now.

              The very best thing the government could do right now – is to triple the intake at the dental school at Otago University; and set up another one – somewhere in the North Island. I'm not particularly keen on it being in Auckland or Wellington – accommodation issues – but Waikato might be an option – they certainly seem to want some kind of medical facility. They could also do something about controlling the cost of qualification — IIRC dentistry is just about the most expensive qualification – more than med school. Which lessens the pressure for the dentists to charge more to pay back their student loans.

              Increasing the numbers of qualified dentists will exert some downwards pressure on fees, and increase the service in small town/remote areas.

              Once you have adequate numbers qualified (replacing the retirees) and in the training pipeline – then you can look at gradually extending the free or low cost provision.

              However, I'm not seeing this government do anything about increasing the numbers training in either med school or dentistry. I have no idea why….

              • joe90 …
                3 June 2023 at 2:50 pm

                Dental treatment at hospitals is free

                As friend who's finally going to get a new knee found out at a recent pre-surgery dental appointment, hospitals do pain relief and extractions for free. That's it.

                • Belladonna …
                  3 June 2023 at 4:18 pm

                  Yep, you are quite correct. I did mean emergency dental surgery (extractions, etc.) – not routine dental care or preventive treatment.

                  And, you'd be bloody lucky to even get that ATM.

              • miravox …
                3 June 2023 at 8:07 pm

                Completely agree with all of this. bonding is also an option for cutting the cost of training (student loan reductions) and improving smal town/rural supply. But that's not in vogue anymore.

                I'd be keen to see some analysis of the reduction in chronic inflammatory conditions (e.g. heart disease, diabetes, asthma, rheumatoid arthritis etc.) if oral health was significantly improved. But even then, the govt is running up against long-term benefit vs immediate high costs.

                We always discount the future.

          • Incognito 10.2.1.2.2
            3 June 2023 at 5:21 pm

            As always, it depends on whom you ask. One billion dollars sounds like a nice round number aka a ‘Joyce number’.

            https://www.scoop.co.nz/stories/HL2211/S00030/on-the-case-for-universal-free-dental-care.htm

            • Belladonna 10.2.1.2.2.1
              3 June 2023 at 5:35 pm

              The one billion came from Robertson – but he said it was only an estimate.

              As I said, I don't think we (as in NZ MoH) has any idea of what the unmet need actually is.

          • UncookedSelachimorpha 10.2.1.2.3
            4 June 2023 at 2:36 pm

            "cost prohibitive". Misleading nonsense from Robertson. Only prohibitive if you are wedded to your current views on tax and economics.

            Universal dental care can be paid for by a miniscule 1.2% p.a. wealth tax on just the 311 wealthy families looked at in the recent IRD tax study. They can easily afford it and are currently paying lower effective tax rates than minimum-wage workers.

            • Belladonna 10.2.1.2.3.1
              5 June 2023 at 2:31 pm

              And do you also have a magic wand to conjure up enough dentists to deliver the service?

      • joe90 10.2.2
        3 June 2023 at 12:50 pm

        Which countries have universal free dental Care?

        Other than the much touted free Cuban dental, most countries I looked at seem to offer a free service for under 18s and than a mix of treatment options under medicare/insurance plans and co-payment/subsidy schemes.

        https://www.helsenorge.no/en/payment-for-health-services/who-pays-your-dental-bill/

        https://www.forsakringskassan.se/english/dental-care-subsidy

        https://www.fyidenmark.com/dentalcare.html

        https://www.infofinland.fi/en/health/dental-care

        • Belladonna 10.2.2.1
          3 June 2023 at 1:07 pm

          I agree that the leading countries in 'free' dental provision offer much the same as NZ. Indeed NZ is often touted as a free-dental system to aspire to.

          While it might be nice to have (I certainly wince every time I pay the bill at the dentist) – it would be hugely expensive. And, more importantly, undeliverable.

          NZ currently has a massive shortage of dentists. We are not training anywhere near replacement numbers – and haven't been for at least the last 20 years. Dental nurses/hygenists also seem to be in short supply.

          While in theory, you have free dental for kids under 18 – you have to be a committed parent to make out of school hours appointments (the on site school dental service is overwhelmed, and sees only the most urgent of cases – IDK how they define it – but kids regularly go 3 years without a school dental appointment); and/or to find a dentist which will enrol teens (most established ones won't – they make more money from adults, than they do from the government payment).

          Throwing in theoretically free, but actually unavailable, dental service as an election promise – would expose Labour to ridicule. Both in how to pay, and how to deliver.

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