- Date published:
8:24 am, June 1st, 2023 - 64 comments
Categories: benefits, budget 2023, cost of living, equality, inequality, tax, welfare - Tags: redistribution, tax cuts, universalism, wealth distribution
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?
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:
On the other hand, universal social benefits have several advantages that enhance their redistributive potential. For example:
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:
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).”