By Gareth Morgan*
Dear Lefties, despite your denial, most New Zealanders care about poverty – but not for your proposed solution.
I do care about poverty
Given my recent comments about the state of the Left in New Zealand, I have had many questions about whether I care about either inequality or poverty.
There is much written overseas, particularly in the US, about the growing income gap, although the NZ data shows that has not been the case here since the mid 1990s.
To be honest I find the whole inequality debate a bit shallow.
That’s not to deny that NZ is seeing a growing number of people struggling to make ends meet, many of who are in the paid workforce.
If wages are no longer enough to live on then there is clearly a problem.
But not the solutions offered by the Left
What matters is how to solve that issue.
The Left recommend raising wages, as though the employment effects of that either don’t exist or don’t matter. They point to studies that show moderate rises in the minimum wage have no impact on employment.
This evidence is used to leap to the false conclusion that you can legislate poverty out of existence by decree without impacting on jobs – naive.
Minimum wages do matter, now more than any time in recent memory because of the increased international mobility of capital and the power of automation technologies.
In other words if people get too expensive, businesses can move overseas or replace them with robots and online services.
The voting public accepts this – just another reason the Left lost even further ground at the last election.
Like most regulation, minimum wages only exist to stop the worst abuses by the dregs of businesses – those employers unfit to employ people anyway.
We do need to do something
Nevertheless a government that wishes to remain in power won’t do so by standing aside and doing nothing, hoping it all self-corrects in the end.
In the financial market bubble conditions of pre-2007 some households could avoid the reality of insufficient income by ‘eating their houses’ (using debt to increase their spending on the back of rising house prices).
Without that option, we are certain to see the sombre spectre of more and more households struggling to make ends meet.
But Working for Families isn’t working
Both National and Labour have recognised this and Working for Families (WFF) introduced by Labour in 2004 has been the policy adopted to address the conundrum of inadequate income from paid work.
But WFF is riddled with selection and incentive issues, which illustrate that it provides no real answer.
For example:
1. who decides what form a family should take in order to be eligible for WFF?
2.the insidious poverty trap that it creates, because the WFF payment reduces when wages rise.
The problem with targeting
The problem with a benefit regime that is founded on identifying and targeting need, is that the targeting criteria it requires are always open to criticism.
This is bad enough when beneficiaries are just a small group but becomes a fatal flaw when the system needs to supplement the income of a large swathe of the paid workforce.
When so many beneficiaries are caught in the net, these very high effective marginal tax rates have a massive impact.
Why? For the same reason that very high tax rates on higher incomes don’t work – people lose the incentive to seek a higher income and/or they cheat the system, finding loopholes in the tax or benefit regime.
We need to rethink the tax and benefit system
So in the face of this global trend (global at least in the sense its crawling across all developed economies), we need a total rethink of our tax and benefit regime.
Raising tax rates to ultra high levels in an attempt to raise more tax is no more acceptable than expanding the targeted benefit regime across more and more of the population.
And as it happens, neither is necessary either.
If we care about a growing proportion of our population having stagnant or falling real incomes when overall GDP (or national income) is rising, we have to find an answer.
Thankfully we have an answer – and it is to expand the tax base and the benefit base, not to ramp up tax or benefit rates.
An Unconditional Basic Income
Let’s go back to basics. New Zealand, on most measures, is a rich country. By definition then there is no reason that everybody shouldn’t have enough to live on.
If we start with that as a given, then the goal is finding a way to ensure nobody goes without, but we must avoid destroying the market and political mechanisms that have made us so rich.1
Accepting that everybody has a right to live a dignified life is the first step.
Accepting that this is a right, not a privilege – and so is an unqualified entitlement – is the second.
From this flows the philosophical justification for a UBI (Unconditional Basic Income). Everybody gets the UBI, no questions asked.
Why higher income taxes aren’t the answer
Second, for this to work we need to accept two principles about tax. Firstly that a progressive tax regime (higher tax rates on people that earn more income) isn’t overly smart.
People tax dodge and/or don’t strive as determinedly to raise their income when government pinches most of it.
But on the other hand a tax regime that has huge loopholes in it is a terrible affront to fairness and distorts no end how investors invest their money.
Our current tax regime is such a leaky boat and well overdue for patching up.
I bet you haven’t heard anyone talk about a flat tax and an Unconditional Basic Income in the same breath. Does that make me left or right wing? I sure as hell don’t know – or care.
Plugging the gaps in our tax system
Where our tax regime leaks like a sieve is the way it taxes the income earned from investments.
And I don’t just mean cash income, I mean all the income (including services) that investors get from their investments.
Sometimes income is taxed fully (e.g.; in a bank deposit), other times its not taxed at all (e.g.; an owner occupied house or a business or farm that never makes a profit but serves handsomely as a tax shelter).
This is why we advocate a Comprehensive Capital Tax (CCT) to ensure that all income derived from capital is taxed, not just some of it.
A CCT is not a capital gains tax, in fact I’m against capital gains taxes because they are complicated and create all the wrong incentives.
The complications around capital gains tax get even worse when you exclude the family home as Labour and the Greens suggested at the last election. As John Key said – and the electorate agreed with him – such a capital gains tax is a joke.
With those two reforms to our tax and benefit system I propose, we can protect people’s incomes and jobs in a way that also increases the choices they have, and underwrites a quality of life that all New Zealanders should be entitled to.
--------------------------------------------
This article was first published on the blog garethsworld.com and is here with permission.
34 Comments
Anyone notice the catch pharse popular in 2011, 'catching up with Australia' was completly absent this election.
Making 18k income tax free will create a bottom up economic boom, obviously.
Our taxation levels are poorly designed to cope with inflation, caused by the reserve bank interest rates and property speculation, so our wages actuall fall further behind living cost rises.
When the economy is good, we pay more for commodity products because the prices are set in New York, not at the farm gate. Key wouldntshop at supermarkets, so he wouldnt know what it costs us peasantry to live.
GST is already a form of capital gains tax when houses and property are sold.
Plus house owners pay GST on rates linked to property values in Auckland, so thats a secondary CGT paid every year, do the math. I wont be retiring in Auckland after I retire, in will take my pension to the Phillipines, could live pretty well there on it. And have a maid.
- Tax doesn't cope with inflation, but fiscal creep funds all the promises of Government. It's tax increases by stealth.
- GST is zero rated for land sales, so not sure what you're on about there.
- One L, three P's in Philippines by the way. Just so you don't embarrass yourself when you write that on your departure card.
Would the UBI replace all benefits? It would save a goodly amount of administrative costs if it were, and that's a major argument in its favour. But unless it was extremely generous, it would leave somebody currently in receipt of a lot of benefit income - eg, a homeless, unemployed, unqualified, disabled single mother of five under-twelves, who also has caring responsibility for both her elderly superannuitant parents - worse off than they are now. And the more generous it is, the more money you're giving to individuals who are capable of earning good money for themselves, and the more it costs people on lower incomes.
Gareth Morgan - Further and better particluars required
Capital
1. Are you referring to Capital that is located with the territorial jurisdiction of New Zealand or do you include Capital and assets located offshore but owned by New Zealanders. How would you track it?
2. How would you treat New Zealand property owned by non-residents. Example being an NZ high rise apartment building where all the apartments are owned by residents of Hong Kong, and traded in Hong Kong, each and every apartment changing hands once a year
3. The daily $3 Billion foreign exchange in NZD sloshing around and changing hands in London every night and never landing in-country, without ever touching the sides of NZ
4. The $ billion or so of hot money arriving into new zealand every day
5. The overseas assets of Fonterra, outside NZ territorial jurisdiction, in the form of businesses, and land, and buildings, and cash, and farms, and shares, and livestock and goodwill
6. No exemptions or exclusions now
Your explanations prior to the next episode would be appreciated
Nice sentiments, but, and as always, t'devil's in t'details.
Particularly of the CCT and the definiton of 'Capital', and the valuation thereof.
Definition may be able to be finessed, but valuation, oh brother.....
- Going concern or fire sale or cost or scrap value?
- Valued by whom, at whose expense, and with what frequency?
- Should a 3 bed 2 bath one double garage house be valued the same everywhere - after all, it's use value to a given occupant is identical regardless of location?
- How to value intangibles for which nevertheless an income stresm could be derived (that State house with a water view...) - the notion of best use rather than existing use?
- Location of certain 'capital' -software is a great example. Portable at the speed of light...
- How to prevent valuation rorts, asset parcel-passing, and other dubious prsctises?
- How to arrange things so that yet another massive economic deadweight is not brought into the world?
Effort - B+
Detail - D-
What can we learn from Denmark?
http://www.huffingtonpost.com/rep-bernie-sanders/what-can-we-learn-from…
When I read this explanation of Danish society it reminds me of a NZ I once knew. Now, I see NZ going the American way as cited in this article at a frightening pace.
NZ simply cannot maintain any likeness of a social safety net unless the government raises its taxation income. Pure and simple.
I disagree with Gareth - people of my generation did not grow up as tax dodgers. I recall before my 30th birthday going into the highest tax bracket, which at the time was 60 cents in the dollar. I was proud to have achieved that milestone. Never thought twice about "deserving" more - we lived well - and wished the same good fortune on everyone. Drank at the local pub every Friday night with the rest of the neighbourhood - gave to the Sallies as they walked through, bought a meat raffle ticket for whatever local fundraiser was going that week. People from all professions and trades and diverse countries of origin all standing round the same table discussing the fishing, the kids, the weather and plans for the next holiday coming up.
Call me nostaligic - but NZ was a really, really, really lovely place to live - regardless of the fact that we paid some of the highest taxes in the world. It just didn't seem to be a very big deal.
I have a friend there, he tells me jobs are hard to come by, he is an Engineer. The problem is it all costs, and special interest groups ride the wave.
Danish households owe their creditors 321 percent of disposable incomes, according to the Organization for Economic Cooperation and Development. That’s the highest ratio in the world and a level that’s prompted warnings from both the OECD and the International Monetary Fund to rein in borrowing. Danish authorities have argued that households aren’t at risk thanks to high pension and household equity levels.
http://www.bloomberg.com/news/2014-01-06/world-s-highest-household-debt…
Here's some comparisons:
Denmark: GDP per capita PPP = USD41,524
New Zealand: GDP per capita PPP = USD32,768
Denmark: Current account to GDP = 7.30%
New Zealand: Current account to GDP = -3.40%
Denmark: Unemployment rate = 3.90%
New Zealand: Unemployment rate = 5.60%
Denmark: Corporate tax rate = 24.50%; Personal income tax rate = 55.60%; Sales tax rate = 25.00%; Capital gains tax rate = up to 59% (excl the family home)
New Zealand: Corporate tax rate = 28.00%; Personal income tax rate = 33.00%; Sales tax rate = 15.00%; Capital gains tax rate = 0%
Kate - this is the reason for the changes that happened and happening and cannot return to the good time we had:
That would have been before my time... and a cruisey case for the urbanites that got it.
I remember getting less in my paypacket each time the government adjusted the tax rate "to help the lower income people".
I remember dozens of employers and tradespeople who simply did not have the money to invest in anything, tools, research, training staff. What was made in the business pretty much resulted in hand-to-mouth survival.
I remember the stigma of alcohol - either you were professional and could afford to drink, or poor person and drunk because there wasn't hope. My own family had to avoid such things as we didn't have that money.
Again with the refrain.... nice if you were one of the few lucky ones - wake up though, because most people don't have that... chances are if you're living the good life, you won't even see those poor folk who can't afford to get in the door. Enjoy your cake...
Neat article, but suggest author leaves Wellington and visits places such as Northland where the minimum wage has become the standard wage for thousands of workers. Non negotiable especially in the service, hospitaility and horticulture industries.... all of which are considered "growth industries" up here. Supply and demand dictates that with high unemployment, businesses have no incentive to pay a dime more than the legal minimum.
But nice to see someone "looking outside the circle".... pity no one in Government will see any reason to change any of the prevailing policies... business as usual for the next three years.
Not sure who or what you think your view is "opposite" to. Nobody is in favour of poverty, nobody thinks it beneficial either to society or to the economy.
But there is room for discussion as to what exactly poverty is, what causes it and what is the best method of addressing it.
That discussion should be had, and credit is due to Gareth for at least trying to have it.
Writing off anybody who doesn't agree with one particular diagnosis/prescription as "not caring about poverty" is ignorant and unhelpful.
Disagree. Plenty of people are in favour of poverty. They are called capitalists. They think it is beneficial to society as it provides a cheap work force that supports economic competitiveness. It is very beneficial to their part of the economy (in their view).
They are also called libertarians. They believe that everyone who wants to, makes their own success, and that those that suffer in poverty do so because of their own choices. That to prevent this is to dis-incentivise people to 'work hard' and to reward bad behaviours.
Economics is body of dogma largely used to justify that things can't change.
Poverty? As a society or community people need: Shelter. Food. Water. Clothing. Access to education. A sense of purpose. Since a few decades after the industrial revolution we have easily been able to shelter, feed, cloth and teach our entire population.
Economics has been one of the key propaganda tools in justifying all the reasons we don't.
Before the enlightenment prients served the same role then that economists serve now (to justify that the people in power should be there and that nothing can change). When the enlightenment started Voltaire and others realised that the priests (economists) controlled the language that framed the debate, so one of their first acts was to publish dictionaries and take back control of language from priests (economists) and talk in words that actually mean something. See 'The Philisophical Dictionary' or more recently 'The Doubters Companion'
Scepticism...I very strongly disagree with you!!! In fact I am down right annoyed.
Go live in some poor areas and help people out......bend over backwards to get those kids who come from poor homes to do well at school, give them opportunities that they would not otherwise get, encourage them to set goals and do well, get them part-time work before they leave school so they have some experience, encourage them to take on higher learning......and guess what happens........you can't help them all.......you'd be lucky if you if you effected change in 5% of them by the time they are 20......in countries like NZ some people think it is the right to have a handout...if you go to a 3rd world country and give them a hand out they make the most of it.
Blaming capitalists and libertarians is an absolute cop-out......in fact I know heaps of people who identify with capitalism and libertarianism and they are always helping other less fortunate people out......I know heaps of people who claim to be socialists and they will not lift a finger to help or assist anyone but themselves.......
There is one consistency where there is poverty.....and that is a someone running/ruling a country and their bureaucracy.
Chew on this:
OceanaGold, an Australian mining company, is trying to compel El Salvador to allow it to mine. If it wins a high-profile legal case, the results for the poor country will be dire
The stream that leads into the San Sebastian River in the poor and tiny Central American country of El Salvador runs bright yellow, not for the gold in the mine nearby but for the chemical byproducts which leach into the water. That stream is emblematic in a fight between an Australian mining company and the El Salvador government, over whether there should be gold mining in the country.
If El Salvador wins this fight, it will preserve a bipartisan policy on mining, a country’s right to make policy generally, and to protect its main water supply in particular.
If it loses, then a foreign mining company will be able to ride roughshod over the country’s democratic process and prosecute a financial claim that could send its government broke. Read more
More corporate outrages can be read about here
I perhaps have not been clear. I do not blame capitalists or libertarians for poverty. I was disagreeing with the point that everyone is against poverty. There are people, who describe themselves as either of these terms, who believe exactly what I described; that poverty is essential for an effective economic system, and that those who are poor are so because of their choices. Not everyone who describes themselves using those labels thinks those things, but they are common points of doctrine.
I am also not suggesting you can help everyone. I am stating that our species has the technology and capability to feed, clothe and house all of our population (in NZ anyway), and that not doing so is a choice, not an inevitability. It is justified using economic dogma, with economists playing the role of a modern Dr Pangloss in various ways always saying that this is the best of all possible worlds.
Your judgement that when helped kiwis they are not as grateful as people in poorer countries is not relevant to the point I'm making, and I'm not really sure what you are trying to state by it? That we don't know how lucky we are?
A classic case of "reductio ad Thatcherum" - any time anybody mentions the word "society", wheel out that quote as if it closed down discussion.
Yes, Thatcher said "There is no such thing as society. There are individual men and women, and there are families. And no government can do anything except through people." So what?
If you agree with her that there is no such thing as society, separate from individuals and separate from Government, then what are the implications of that for a discussion about how best to address poverty? If you disagree with her, if you think that there is such a thing as society, separate from individuals and separate from Government, then what are the implications of that for a discussion about how best to address poverty?
How about there should be a society, seeing as it has been broken down in a number of ways, mainly ones that replace that society with an emphasis on money. Once even before the 40 hour week, we still kept Sundays aside for things for social than monetary. We have broken down many of things that kept us interconnected. This thing I am tapping on right now is no real replacement for that.
Connection with society raises people's preparedness to help each other out. Neo-liberalism has almost made us a sociopathic society (only using society there as a convenience as I can't be bothered trying to find another word for it)
OK, here's a possible way of getting to the bottom of what you actually mean when you call for a "society".
Can you construct a sentence beginning "Society should ..." which does not in practical terms mean "The Government should force people, whether they like it or not, to ..."?
'Society' should encompass all individual interactions that can be reasonably argued to be within the realm of a justifiable social contract, and only those.
'Society' should be the embodiment of the benefits of the free relinquishment of individual freedoms in return for societal benefits.
'Society' should provide a better life for all individuals than they can reasonably achieve in the 'state of nature'.
Could you give some examples to further clarify (1) and (2) please?
What sort of individual interactions might be "reasonably argued to be within the realm of a justifiable social contract"? As opposed to what - what sorts of individual interactions are either not encompassed by "Society", or not "within the realm of a justifiable social contract"?
What individual freedoms are freely relinquished in return for societal benefits? How should "Society" treat those who don't want to relinquish their freedoms in return for such benefits?
As for (3), certainly people who are willing to work together are likely to achieve a better outcome for each participant than he could on his own. But that's not "all individuals". How would "society" provide a better life for those who are not willing to work for it, or who are not willing to work with others because they think they'll be better off working on their own, and why should it?
1) I would answer that actions that impact on other members of society that are not actively choosing to be part of that interaction are within the realm of a social contract, such as treatment of another's property, or violence, or what side of the road you drive on. Actions that are not encompassed are activities like what music you listen to at home, or what sex acts go on between consenting adults, that can be argued only impact the persons actively involved in that interaction (I realise that there are philosophical arguments that everything impacts others, but in an attempt to give a general answer thats about as good as I can do)
2) What interactions are freely relinquished? driving on whatever side of the road takes your fancy, in the belief that we are all safer. How should society treat those who don't? That is a pretty big question, with no simple answer that I know... there are ideals of how a humane society treats dissidents, but I don't know of a one size fits all solution, only naive ideals to aspire to.
3) Every 'self made man/woman has benefited from so much that society offers. By not having to invent their own language, mathematics, agriculture etc they have already benefited from society without contributiing anything. Everyone is 'standing on the shoulders of giants'
Why should society help those who do not contribute? Compassion.
Raegun....We are individuals who make up a collective but Society treats us a collective of individuals.......this treatment of one shoe fits all buggers up the individual as it only recognises the collective.
I agree that there is an emphasis on money......individuals are stuck working for the collective for 6 months of the year (that's how long it takes to pay all your taxes) then the individual has to pay around 60% of their next bit of earnings to keep the roof over their head and the rest in other basic living costs........don't be fooled by the wolf dressed up in sheeps clothes for they are not Neo-Liberal.......they are sociopaths of another ilk.
economy became more important than "society" when YOU, _Craig_, failed to pay the underwriting cost of your "society".
How do people say things like "And...when did the economy become more important than society?" with a straight face??? Have they never stood in a WINZ line wondering how they're going to get groceries with a 10k debt.... (student loans doesn't count)
Gareth Morgan. We workers don't want your patronising, paternalist charity. History has shown it only leads to social division, the stigmatization of the needy, and building resentment amongst the more fortunate who must pay for it.
Draw a lesson from the Poor Laws or even more recent times, specifically the early 1990s where the New Zealand economy and society were wrenched by convulsions brought about by the imposition of the neoliberal reforms and damaging monetary policies carried out by Don Brash. These brought about a severe drop in economic activity, a sharp rise in unemployment, and traumatic social dislocation which many sectors of society has yet to recover from.
What we want is economic security and fair reward for a fair amount of labour. Instead what we get is government and Reserve Bank monetary policy which undermines the very thing which is most important to us. Those polickes get dressed up as being for the public good when its tfansparently obvious that the only beneficiafies are the financial markets and the self entitled middle class who love nickle and diming so they can afford to buy a fancy car, a holiday bach, overseas holidays, and invest in a portfolio of rental properties to end their life in comfortable retirement.
To add pathos to the Greek tragedy we the victims get blamed and persecuted for the negative outcomes of those very same policies.
"What we want is economic security and fair reward for a fair amount of labour". The problem with this is that the amount of labour is less important than the type of labour.
I work in the technology industry. Ultimately, my job is to make machines perform the job of humans. If I do my job well enough, we don't need your labour - your labour has no value.
The fruits of my industry's efforts are everywhere, and ever-encroaching. Factories are increasingly automated. The roles of the human workers that remain in most industries are enhanced by software, meaning that less humans are required to do the same task.
Entire classes of jobs are eliminated or substantially shrunk by technology. A big one I'm expecting is the automation of all tasks related to driving vehicles. It might not happen for 10 years or more, but it most certainly is coming - no taxi drivers, no truck drivers.
Some will claim that new roles will appear to employ the surplus people. But these roles increasingly require advanced education, which doesn't work for everybody. And if I'm doing my job correctly, there will be less of them. If I do it right, one day there will be too many people and not enough work.
Do I feel guilty that I am depriving people of their livelihoods? Not if the machine can do a better job - if we use a human to do a machine's job it's an inefficient charity. Let the machine do the work, and let the human reap the rewards.
But we should all benefit. The only reason we all feel we should work is that society has deemed this normal and expected. We needn't feel this way. Ultimately machines could do all the 'useful' work to keep us alive and happy. We humans might work only because we choose to. Precisely what we would do otherwise is a challenging problem, but one for another day.
The catch is that right now the humans that are rewarded are those that own the machines. To some degree this is fair - they work to create these things. But as the machines' share of the work increases, so to do the rewards to the owners. Now their share is getting too big, at the expense of the rest of the population.
That's why Gareth wants to tax the capital (the machines) and distribute the proceeds to the rest of society, moving us towards this basic standard of living for all people that we can surely afford.
The bit that's hard is not handing the money out. It's taxing the capital base fairly and not causing undue hardship to anybody. This problem will take some time to solve...
Andrew S, I'm well abead of the curve in terms being aware of the spectre of technological unemployment, having read Martin Ford's Lights In the Tunnel which foreshadowed tbe preoccupation amoungst today's economic commentators. His predictions about the developments relating to technological change and expansion of the domain of economic activity affected by ICT has proved remarkably prescient.
The compulsion to invest so much in automation stems in large part from corporate manager's antipathy toward workers and a unquestioning faith in technology to solve all our problems. For a great antidote to technological triumphalism in the context of manufacturing I highly recommend the blog of Bill Waddell.
http://www.bill-waddell.com/blog/30-the-manufacturing-technology-frenzy
http://www.idatix.com/manufacturing-leadership/america-makes-little-sen…
I bet you professionals wouldn't like it if your proffessional associations could no longer insulate you from the global market in labour with the cost and difficulty of translating accreditations and qualifications, high local standards etc You all would be first to whinge and demand government intervention
Right on the money.
I could have just about stomached Roger Douglas and his disastrous policy implementation if the professional guilds of New Zealand had been included along with the rest of us.
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