TWG: Importance of Working for Families recognised, but problems not addressed

Child Poverty Action Group (CPAG) welcomes recognition by the Tax Working Group (TWG) that Working for Families (WFF) provides vital tax transfers to low-income families to offset high taxes on low incomes and make taxes fairer.

Working for Families tax credits have been labelled recently as anything from "communism by stealth" to an "employer subsidy" for low-waged families, despite that a critical function of the package is to moderate the effects of a broad-based flat-ish tax system and a high rate of GST without exemptions.

CPAG is disappointed, therefore, to see that there is no analysis of the fundamental problems with Working for Families in the TWG Interim Report.

"At very least, the In-Work Tax Credit should considered as part of the Tax Working Group’s agenda, as it is a tax measure designed to influence behaviour. The Tax Working Group has a mandate to investigate the use of the tax system for social ends," says Associate Professor Susan St John, CPAG Economics spokesperson.

"While the In-Work Tax Credit operates very poorly as an incentive, it is a vital part of Working for Families. It is a payment for children that helps address child poverty. The way it masquerades as a work incentive has been used to justify the damaging exclusion of the worst-off children when their parents don’t have enough hours of paid work."

CPAG has long argued that the requirement to meet fixed hours of paid work per week doesn’t work in a modern fractured labour market. If all low-income families, irrespective of their income source had this tax credit, it would be a meaningful step to reducing the worst of child poverty.

Children of beneficiaries are living in households where income may fall far below the national equivalised median (after housing costs). One of the Government’s poverty measures is income that falls below 60% of this median. When income is from core benefits and tax credits alone, families may have as little as 22% of the median. Giving such families the In-Work Tax Credit of $72.50 is a very cost-effective way to start to give the large boost in income that is needed.

The Tax Working Group has left a number of questions unanswered - such as how they should deal with the very high abatement rates that reduce the impact of tax credits after the income threshold is reached. CPAG advised that Labour should not adopt National’s policy of increasing the Working for Families abatement rate from 22.5% to 25% which is now complicated further by overlapping abatements of the increased Accommodation Supplement (25%) and the new Best Start payment (21%) when it applies. Many low-income parents also pay 12% of each dollar over a very low threshold ($19,448 a year (or $374 a week) in student loan repayments.

"Working low-income families can experience very high effective tax rates over long income ranges," says St John.

"In tax terms, this is economically inefficient and distorts behaviour. In social terms it creates a poverty trap. If this issue is not in the scope for the Tax Working Group, then whose scope is it in?"

Read more in CPAG’s feedback to the Tax Working Group here.

ENDS

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