Friday, June 11, 2004

Could this be the start of a beautiful friendship?

National's Simon Power deplores the high effective marginal rates for some families following the budget (see norightturn). Labour's Steve Maharey points out that these effects are inevitable with any targeted family (or other assistance) program and that the budget has merely raised the threshold at which they occur.
They are both more or less right (Simon shouldn't have included ACC deductions since these provide an income-related private benefit but they don't make much difference to his argument) but neither of them say where they stand on making these (and other benefits) universal - which is the only way the problem can be avoided.
It can be done. A (pre-budget) analysis by your favourite spectre indicates that a "Universal Marginal Rate" system whereby everyone pays a tax rate of 39% on all taxable income but receives a "Universal Income" roughly equal to current benefit entitlement (according to family size and location) would cost about 6 billion to implement (5-10 years tax reform at current rates). This would give similar benefits to the budget for middle to higher income families but would extend to any income and eliminate the high marginal rates Simon so rightly deplores. The same scheme can be made fiscally neutral by increasing the tax rate to 45%. This make all high income earner's worse off (compared to the 39% rate) but the couple in Simon's example would need to earn over $200,000 before they received a net tax increase (compared to the current system).
It's not realpolitik to expect this sort of change to be made overnight. The outcry from middle to high income DINKs (Double Income No Kids) - or single-income childless couples who can split their income for tax purposes -is always going to drown out the gratitude of the relatively limited number of taxpayers affected by the high effective marginal rates but, at the end of the day, it's just plain unfair that a single-income family with three dependent kids earning say $100,000 has to pay the same net tax as a single person with no dependents on the same income, or $7500 MORE than a DINK couple earning $50,000 each. Would it be too much to ask for a bipartisan (or multiparty) accord that a universal marginal rate system is at least an ideal to work towards? At least that way we might hope that future changes would advance us towards that goal (as the current budget does but a simple increase in base benefit levels or reduction in nominal tax rates would not). The Greens and Alliance have traditionally favoured universal benefits and United Future could hardly oppose so obviously family-friendly a policy. If National and Labour have also discovered the problems of excessive effective marginal tax rates we could really be onto something.


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