1.
Family and Work Tax Credits in Five Liberal
Welfare States
Dr Patrick Nolan, Principal Advisor
New Zealand Productivity Commission
13 July 2017

2.
What is covered
• Policy changes modelled
• Modelling approach
• Results
• Conclusion

3.
Policy changes modelled
• Aspects of Family Incomes Package in Budget
2017
– Income tax thresholds increased ($14,000 to $22,000 and
$48,000 to $52,000)
– Family Tax Credit reform (simplification of age-related
scales, change to abatement threshold and rate)
– Not modelling Accommodation Supplement changes and
removal of IETC
• Increase in minimum wage
– Currently $15.75, proposed $16.50

4.
Modelling approach
• EMTR schedules
– EMTRs show how much of a dollar increase in earnings is
kept as income in the hand
– Put simply: EMTR = 1 – ∆YNH
– But can be complex to calculate in practice …

5.
Modelling approach
• To illustrate …
– YAG =
– WFF =
– TP and ACCP =

6.
Modelling approach
• Model family approach
– Shows assistance received/EMTRs faced by particular
family types
– Can recognise a range of criteria for targeting (e.g., family
size, ages, wage rates, hours of work, etc.)
• Show assistance/EMTRs for hours of work at
selected wage rates not by income
– Putting income on the horizontal axis can be misleading,
especially given differences in wage rates across countries

7.
Modelling approach
• Model family approach
– Requires choosing “representative” cases, e.g., I assume:
• Jobseekers Support rates (1 April 2017)
• Minimum wage
• 2 young kids (aged 3 and 1)
– Not all assistance received is modelled
– But scenarios in models can be updated easily
– Models are available on request

8.
Modelling approach
• In relation to the comparison of tax credits
(refundable tax rebates)
– Includes New Zealand, Australia, Canada, United Kingdom,
United States
– Parameters converted into $NZ using OCED PPP rates
(2015)
– Classified as liberal or residual welfare states on basis of
work effort, reliance upon targeting, entitlement rules,
role of work in poverty relief (Esping-Andersen, 1990)
– But important differences too – e.g., New Zealand has
relatively low use of contributory programmes and time
limits

9.
Tax credit entitlement: single, 25+,
2 young kids, $15.75

10.
Family Income Package and Tax
Credits
• Treatment of family types is thus complex but as an
illustration (not necessarily representative so treat with care):

11.
Single, 25+, no kids, $15.75

12.
Single, 25+, 2 young kids, min. wage
change ($15.75→$16.50)

13.
Single, 25+, 2 young kids, min. wage
change ($16.50)

14.
Single, 25+, 2 young kids, weekly gain
from min. wage change ($15.75→$16.50)

15.
Conclusion: roles of different
instruments
Source: Nolan (2007), ‘Lifting families’ incomes,’ Policy Quarterly, 3(2), pp. 22-29

16.
Conclusion: inevitable trade-offs
• John Kay, writing on the idea of a universal basic
income (emphasis added):
The complexity of current arrangements is not the result of bureaucratic
perversity. It is the result of attempts to solve the genuinely difficult
problem of meeting the variety of needs of low-income households while
minimising disincentives to work for households at all income levels –
while ensuring that the system established for that purpose is likely to
sustain the support of those required to pay for it.
As in other areas of policy, it is simply not the case that there are simple
solutions to apparently difficult issues which policymakers have hitherto
been too stupid or corrupt to implement.
Source: Kay (2017), The Basics of Basic Income, Intereconomics, Vol 52, March/April 2017