Fiscal and Welfare Barriers to Effective Fatherhood
1999 Wellington Father's Forum
Keith Rankin, lecturer in subjects relating to political economy and economic history, outlined in his speech, how families are financially penalised by the present tax and benefit system, and put forward a proposal for a solution. Excerpts:
"There are many reasons that lead to fathers playing an incomplete role in the raising of their children. Financial factors arising from public policy may not be the most important of those reasons. Nevertheless, fiscal and welfare incentives do lead to more parental separation than would otherwise be the case if those incentives were not there. And tax-benefit considerations (while including mandatory "child support" payments) increase the difficulty of maintaining caregiving relationships between fathers and children following a marital separation.
Unlike many other countries including Australia, New Zealand families' principal providers (which more often than not means fathers) do not receive tax allowances or rebates. All labour income is taxed individually, at a marginal rate of 15% (for the first $9,500 of annual income), 21% (for income in the range from $9,500 to $38,000), or 33%. An additional 1.2% is payable to the ACC. If a father is separated from his family, he loses no tax allowances, so his after-tax income (before child support) does not fall. There is no direct tax incentive for him to stay. Compared to Australia, these tax rates are high for low income earners, and are low for high income earners. Fathers of young children tend to have below-average incomes. In the 1970s, the real incomes of young men have fallen markedly relative to their fathers' income.
EXAMPLE Husband, wife and two children, say 7 and 5 years old. The wife has a stable part-time job, which brings her a gross income of $200 every week. The father has an outstanding student loan and child support liabilities for a child that he fathered as a teenager during a casual relationship.
If the father is unemployed, the disposable income of the family is $236. If he gets a job paying $600 per week before tax, the disposable income of the family rises to $347. Thus, for earnings of $600, close to the median fulltime wage, his earnings contribute an additional $111 to the family budget. For the first $600 that he earns each week, the effective marginal tax rate is 81.5%.
If the father leaves, the disposable income of the residual family is $14 higher than it would have been for the whole family if he was unemployed. Assuming that it costs an additional $100 per week to support an adult male, a traditional live-in father would need to be earning more than $600 per week to make the family better off financially.
While the father's net financial contribution to his family might be very small, he has a financial incentive to stay and be financially supported by family support and accomodation benefits targeted towards his partner and children, however demoralising that may be. The mother, however, has a significant financial incentive to induce a separation. If she is to do so, she must do so in a way that minimises the chance of her partner gaining custody of the children.
Of course, most parents do not calculate their effective marginal tax rates and then decide whether or not to separate on that basis. The analysis here, however, focusses on the financial incentives which become important when the relationship is stressed. Furthermore, the financial circumstances of many ordinary families create just the stress that leads people to separate when the financial incentives favour separation.
Families are fiscally exploited. Families in general and fathers in particular find themselves in this situation because the social contract that underpins social reproduction has been repudiated by the culture of the WINZ and IRD agencies, and by the legislation that underpins that culture. The official view is that reproduction is essentially a private matter.
The state has a financial interest in the family staying together. The total amounts of benefits payable to a four-person family are significantly higher if the parents separate. Furthermore, the demand for housing increases as separated families increase the number of households.
How do we find a solution to the fiscal pressures that pull families apart and render many fathers redundant as providers and as careers?
Essentially it requires a shift to a "Basic Income/Flat Tax" public accounting system. I have shown that it is possible to immediately shift to an integrated income tax and benefit system, by introducing a flat income tax at 39% to be offset by a social dividend of $123pw payable to all adults regardless of income. ($123pw is the present level of community wage for "married" persons and single persons under 25 years old). This social dividend would be supplemented by a flexible benefit, designed to achieve "vertical equity"; treating people with different underlying needs differently.
Under this proposal, the substantial majority of single-income two-parent families would be financially better off than they are at present."