Purpose
From April 2018, the Families Package increased several social assistance payments delivered through the tax and benefit systems, introduced a Best Start tax credit for families with babies and toddlers, extended the length of paid parental leave available to families, and introduced the Winter Energy Payment.
This report and a companion technical report show how the Families Package changed incomes and measures of financial incentives for paid work for ‘model families’ in working age groups. We look at winter months when the potential income gains and effects on financial incentives were the most significant.
The measures of financial incentives we present are among the many factors that can affect people’s decisions about paid work (with some of the others being the availability of suitable employment and childcare).
In this report, we analyse four model families, similar in composition to those presented in the Welfare Expert Advisory Group’s background paper ‘Income Support System’ in 2019. They are all based in central Auckland. These model families are:
- a sole parent with one five-year-old child
- a couple with two children, one is three years old, one is eight years old
- a single person without children
- a single person without children and with substantially reduced work capacity due to a severe health condition
or disability
Methodology
This report presents measures that capture different dimensions of income and financial incentives to do paid work. These measures are technical terms that are used to explain what happened because of the Families Package changes.
Measures of income presented are net income and residual income.
- Net income is calculated by summing all sources of income (inclusive of earned income, benefits and tax credits) and deducting income tax.
- Residual income is calculated by deducting core costs from net income. In this report we calculate residual income after deducting housing costs (residual income after housing costs). Measures of financial incentives presented in this report are effective marginal tax rates (EMTRs), replacement rates, and participation tax rates, as defined by Figari, Paulis & Sutherland (2015).2
- Effective Marginal Tax Rates (EMTRs) are indicators of financial incentives for a person already in paid work to increase their work effort, through an increase in hours (the intensive labour supply margin). Here, they are calculated as the proportion of additional gross income that is taxed away, taking into account both income tax and the withdrawal of income support (both income-tested benefits and tax credits delivered through the tax system), with each additional hour worked. High EMTRs are generally a concern because they indicate situations where increasing hours worked will result in little or no change in the income received for a family.
- Replacement rates show the level of out-of-work net income (from zero hours of paid work) relative to the level of in-work net income. High replacement rates are a concern because they mean that working provides little or no additional income compared to not working.
- Participation tax rates give the proportion of gross earnings lost as taxes, reduced benefit, and tax credit withdrawal if a person moves from zero hours to a given number of hours of work. Along with replacement rates, they are indicators of financial incentives for the decision whether to be in paid work or not (the extensive labour supply margin). Here we calculate participation tax rates for working 20 and working 40 hours. High participation tax rates are a concern because they mean that working provides very little additional income compared to not working once taxes, benefit abatement, and tax credit withdrawal is considered.
Key Results
- our model families with children benefitted the most from the Families Package. This was due to the increase in payment rates and abatement thresholds for Family Tax Credits and increased payment rates for the Accommodation Supplement
- consistent with the policy design, our model families without children did not benefit as much when compared to our model families with children. This was because the only additional support that families without children could qualify for as part of the Families Package changes was the Winter Energy Payment (if they were receiving a main benefit payment) and the Accommodation Supplement increase
- the financial incentives to leave or stay off benefit worsened slightly during winter months following the Families Package changes, due to the introduction of the Winter Energy Payment, for most of our model families. The exception to this was our sole parent with one child family
- the Families Package did not make large changes to financial incentives, and as a result the broad structure of financial disincentives remained. Many of our model families effectively lost over 50 percent of their earnings in
taxes, reduced benefit, and tax credit withdrawal when moving from zero to either part-time or full-time paid work - non-take-up of supplementary assistance when leaving benefit (for example, through either a lack of understanding of entitlements or reluctance to make a claim) could lead to worse financial outcomes when off a main benefit for model families. This could result in families remaining on main benefit across a wider range of paid work hours even though they would increase their net income by moving off main benefit and taking up the supplementary assistance available.
After the Families Package changes, our sole parent with one child:
- had increased net income of between $48 and $94 dollars per week, depending on the number of hours worked between zero and 40 hours per week. The increase in net income was due to the increase in payment rates and
abatement thresholds for Family Tax Credits and increased payment rates for the Accommodation Supplement - faced lower Effective Marginal Tax Rates (EMTRs) while on a main benefit, but higher EMTRs while off a main benefit. This meant that the financial incentives to increase work hours generally improved while on a main
benefit, but generally worsened while off a main benefit - faced lower replacement rates for 20 hours of paid work, and higher replacement rates for 40 hours of paid work. This meant that the net income when out of work as a proportion of the net income for being in work for 20 hours decreased, while the net income out of work as a proportion of the net income for being in work for 40 hours increased
- faced lower participation tax rates when moving from zero to 20 hours of work. This meant that the proportion of gross earnings lost as taxes, reduced benefit, and tax credit withdrawal for a sole parent moving from zero hours to 20 hours decreased.
After the Families Package changes, our couple with two children:
- had increased net income of between $58 and $104 dollars per week, depending on the combined number of hours worked by the couple between zero and 80 hours per week. The increase in net income was due to the increase in payment rates and abatement thresholds for Family Tax Credits and increased payment rates for the Accommodation Supplement
- faced lower EMTRs while on a main benefit, but higher EMTRs while off a main benefit. This meant that the financial incentives to increase work hours generally improved while on a main benefit but generally worsened while off a main benefit
- faced higher replacement rates across all measures. This meant that the net income out of work as a proportion of the net income in work for either 40 or 80 hours combined increased faced higher participation tax rates when moving from zero to 40 hours of work, and slightly lower participation tax rates when moving from zero to 80 hours of work. This meant that the proportion of gross earnings lost as taxes, reduced benefit, and tax credit withdrawal for the couple moving from zero to 40 hours increased, while it decreased when moving from zero to 80 hours.
After the Families Package changes, our single people without children:
- had increased net income of up to $25 per week while receiving a main benefit during winter months, mostly due to the introduction of the Winter Energy Payment did not see an increase of net income while not receiving a main benefit, as their modelled circumstances meant they did not benefit from the increased payment rates of the Accommodation Supplement
- were financially better off on a main benefit across a wider range of hours worked during winter months, due to the Winter Energy Payment fully abating when moving off a main benefit
- faced a higher replacement rate when moving to 40 hours of work during winter months, due to the introduction of the Winter Energy Payment. This meant that the net income out of work as a proportion of the net income for being in work for 40 hours increased during winter months
- faced a higher participation tax rate when moving from zero to 40 hours of work during winter months, due to the introduction of the Winter Energy Payment. This meant that the proportion of gross earnings lost as taxes, reduced benefit, and tax credit withdrawal for the person moving from zero to 40 hours of work increased during winter months.