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Friday, 31 October 2008

Statism and Wealth Re-Distribution

A post by Glenn caught my eye the other day and I have not been able to stop thinking about it as despite knowing that Glenn knows what he is talking about in this field, I just am struggling to believe his numbers. It really is proof-positive of the socialist extent of Labour's policies in practice and should serve as a warning to anyone tempted to vote Labour because they think the criticims levelled at Labour's attempts to turn as many working people into beneficiaries dependant on the state as possible are exaggerated.

I have reproduced some of it below as it warrants further exposure.

Extract from New Zealand: Land of greed, envy and political stupidity (the election blog, part 1)

Wealth re-distribution is at an almost unbelievable level at present. Take a family with one income earner. At current taxation levels, with an annual income of $40,000, that income earner will pay $7770.00 in PAYE (“pay as you earn”). This includes income tax plus 1.4% ACC (socialised accident compensation insurance). On the whole, that’s about 19.43%. If the earner works more hours or gets a more skilled job that pays more and the income is $70,000, the total PAYE is $18,090. That’s about 25.84%. It gets worse if you earn more than that.

But it does not end there. Let’s add this to the mix: This family has four children below the age of 12. This means that this family will qualify for state welfare for those children. Use the calculators at www.workingforfamilies.govt.nz to check the figures for yourselves. Let’s imagine that there are two families with one earner in each, one earning 40K and the other earning 70K. I’ll be taking into account the payments received from the “working for families” welfare scheme as well as the accommodation supplement each of these families will qualify for. I’ve arbitrarily hypothesised that these two different families live in the same city that I live in, and pay the same amount of rent that my family pays. Taking all of the above into account, here is the weekly combined income from all sources – after tax – for these two families.

Family 1, earning $40,000:
Total after tax weekly income (including welfare payments) of $1018.27
This family will pay $7770 in PAYE and receive $19,916 in state welfare. No, that is not a typo. Nineteen thousand, nine hundred and sixteen dollars of untaxed welfare payments.

Family 2, earning $70,000:
Total after tax income of $1208.27
This family will pay $18,090 in PAYE and receive $10,920 in state welfare.

Take a few moments to take this in: Family 2 earns $576.92 more than family 1 each week. For their extra effort or skill, they end up just $190 better off each week.
The level of wealth re-distribution to minimise the difference in income between these two families is staggering. And yet, each of these families is a recipient of a sizable chunk of the re-distributed wealth of others. The first family effectively pays no tax at all and then receives a further cash bonus of $12,146. But even the higher earning family still receives well over half of the earner’s PAYE payments back.

Who are the benefactors here? The benefactors are those without children who are trying to get by on $30,000 per year and not receiving a penny from working for families (but still qualifying for an accommodation supplement of about $60 per week). The other benefactors are those who receive none of these taxpayer funded handouts but who fund a huge proportion of them: those who contribute more tax because they earn more.

Essentially, the financial landscape this creates is one where a family on a low to medium income with several children has little incentive to increase their salary/wages beyond around $36,000 (the level at which state handouts start to decrease). Even if they had a salary of $70,000, the difference in financial positions would not reflect this increase in earnings.

That’s what I’m talking about when I talk about statism and wealth redistribution. It’s not just rhetoric without substance. It’s a real system that demonstrably penalises the high achievers, and for everyone else it serves as the great equaliser, making it seem like nobody’s earning more than anyone else. When everyone gets ahead – nobody gets ahead, nor is there any incentive to do so.

6 comments:

  1. This form of redistribution penalizes young and student-loan strapped workers, delays the ability to purchase a house, and hence delays family formation. WFF takes no account of existing wealth. I accept the need for some form of safety net, but this is insane. The Boomers exploited Gen X, now Gen X is raiding the coffers. Of course this is only temporary until the Government itself is bankrupted.

    ReplyDelete
  2. Exellent post MandM.

    It shows that you are better off to have 1 child and earn $40K rather than be childless on $70K.


    Earn 40K with 1 child = $52146 in the hand.
    Earn 70K with no children or older children = $51910 in the hand.

    How is this going to encourage people to get educated and improve themselves when they are better off to have a child and stay in an unskilled role.

    What message does that send?

    ReplyDelete
  3. Could you also include the welfare abatement to demonstrate the ridiculously high marginal tax rates? They are also a disincentive to improve your lot.

    ReplyDelete
  4. Well written. My wife has actually encountered people who have received a pay rise and ended up with less take-home pay.

    Many people are now dependent on WFF, so we can't just get rid of it. But we need to adjust the system somehow so you actually get rewarded for personal achievement, while ensuring families have enough income (more specifically, enough buying power, which will be affected both by actual income and by the prices of essentials).

    Labour has been playing Robin Hood for too long, eventually the system will fall over.

    ReplyDelete
  5. The welfare abatement demonstrating the ridiculously high marginal tax rates was factored in, that is why family 2 gets less welfare.

    ReplyDelete
  6. Samuel that happened to us just recently. I got a pay rise - came home chuffed because I got it as a result of performance and not because of the annual pay-rise everyone gets.

    We celebrated! I was on cloud nine. It wasn't just a pay-rise but also came with an increase in my legal responsibilities - a career I began pursuing back in 1993 when I first began studying law and I am still trying to realise. It was a real honour and I felt proud of myself because I had earned it and it had been recognised.

    Then my bubble got totally burst. I phoned the government to tell them about my pay-rise so they could adjust our welfare (there is SO much wrong with that statement!)

    The next thing I know our WFF is slashed by $250 a fortnight, we got a letter from Community Services Card telling us we no longer qualified for that.

    Basically the pay-rise put us right back where we were and now we had to pay more for doctors visits and prescriptions.

    ReplyDelete

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