Wednesday 1 June 2022

Working for Families

There is a minor review of Working for Families going on. 

I can see a lot of ways of making Working for Families worse, but no obvious ways of improving on it. 

Tax is assessed on an individual basis – and rightly so I think.

Need is assessed on a household basis, both for benefits and for WFF – and that also makes sense.

Government decided that it wanted families with kids to get transfers, concentrated among lower-income households. Other places could handle this through an alternative “Married, filing jointly” return giving a lower tax rate on combined incomes plus kid deductions. I still think it's better to maintain an individual-basis for tax filing.

Govt also decided that it wanted to make darned sure that shifting from benefits into work did not make people worse off – and wanted to do that not by cutting benefits but by topping up lower-wage work for those with kids. 

Given those objectives, it set up a transfer scheme benefitting those in work with kids.

And unavoidable facts of mathematics means trade-offs between abatement rate steepness, transfers to higher-income households, the amount that can be provided at the bottom, and overall cost of the programme. 

Want fewer transfers to families at the top? You’ll have more punitive EMTRs earlier on or lower payments to those at the bottom or both. 

Want more transfers at the bottom? You’ll have higher programme costs and more transfers to higher income families, or higher EMTRs across more of the range.

Want less overall cost? It’ll be higher EMTRs, or less support for families whose mortgages now depend on it and who will be hostages for maintaining the thing. 

I see no obvious solution. 

There are obvious ways of making the thing worse. 

Removing the work test for the in-work tax credit would be an obvious way of making the thing worse. 

Extending the range of the Minimum Family Tax Credit so 100% EMTRs apply over a broader range would be another. 

But I see zero obvious ways of making the thing better. It’s all just trade-offs. 

Abolishing the whole thing as part of a package of reforms that substantially addressed housing costs to provide something for those hit by the loss of those benefits might be an option, but it wouldn’t be seen as a good thing by those using WFF to pay off a mortgage on a house that might then decline in value. 

We’ve gotten into a spot where a single-earning family on $60k, or a dual-earning family on up to about $65k pays no net tax but faces a high effective marginal tax rate and the incentive consequences of it. And there is no obvious way to undo the mess. 

The basic income people will tell you that they have a solution, but it doesn't work unless you want to massively increase the cost of the whole thing, or provide less support for those with kids that the government is currently trying to support. 

Some messes can't be fixed. 

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