Welfare: Savings not Taxation

Been sent a paper authored by former finance minister Roger Douglas and Economics Professor Robert MacCulloch. The abstract is:

Many nations are forecast to struggle to publicly fund their welfare states over the coming decades by taxing the young. As a potential way to pre-empt these looming problems, there has been a surge of interest in the Singaporean model which features compulsory savings accounts and transparent pricing of health services. It has achieved some of the best health-care outcomes in the world at a cost that is the lowest amongst high income countries. In this paper we show how tax cuts can be designed to help establish compulsory savings accounts so that a publicly funded welfare system can be changed into one that relies more heavily on private funding in a politically feasible way. To our knowledge, showing how both a tax and welfare reform can be jointly designed to enable this transition to occur has not been done before.

The background includes:

One of the few countries that has successfully controlled health-care costs, whilst also maintaining one of the highest quality services in the world, is Singapore. The cornerstone of its system is the compulsory ‘Medisave’ account. Workers pay a percentage of their wages into their individual accounts. Employers also make contributions. The size of the contributions is set by the government. The funds are used to help pay for services, in addition to funding health insurance plans. Medisave has kept national costs low by helping allow for health services to
become more transparently priced to the users and by shifting a portion of expenses to individuals and their employers.

On the delivery side, services are provided by a mix of both publicly and privately owned hospitals, competing with one another. Government assistance is provided for those who are unable to pay. In terms of performance, Singapore’s universal healthcare system was rated 6th out of 191 nations by the World Health Organization, ahead of most high-income economies.

The tax side:

First, we show how tax cuts weighted towards low and middle income earners can enable the funding of individual compulsory savings accounts. These accounts can be used to pay direct for most medical expenses, cover events related to job-loss and accidents, purchase mandatory catastrophic insurance plans, as well as
build up retirement savings. Tax rates are reduced to zero on earnings up to $NZ 50,000 for single tax-payers (and up to $NZ 65,000 for one income families with dependent children). The funding of the accounts is supplemented by contributions from employers, whose corporate taxes are reduced in lieu.

And cut some costs:

Second, provided that subsidies to two groups, namely businesses in receipt of ‘corporate welfare’ and university students from wealthy families, are stopped then the above tax cuts can be made sufficiently deep to allow most people to establish significant savings balances (on top ofpaying a share of their own welfare costs and retaining their pre-reform disposable incomes).

Combined with a gradual increase in the current NZ retirement age equal to three months per year over the next 20 years (so that it is rises from 65 to 70 years old) the fiscal strains on the public purse coming from funding the welfare state can largely be resolved.

But help out those who need it:

Third, even in the presence of our sizeable tax reductions, the government can still retain sufficient revenues to fulfil the role of ‘insurer of last resort’, helping to pay for those individuals who cannot meet their own welfare expenses out of their savings accounts.

The more detailed tax proposal is:

the corporate tax rate is cut to 17.5 cents in the dollar of profit and the GST rate is increased to 17.5%. The PIT rate falls to zero for single tax-payers (i.e., a single person or a couple with two incomes) earning less than $50,000. It becomes 17.5% for incomes between $50,000 and $70,000, and 23% on income beyond $70,000. For one-income families with dependent children, PIT rates fall to zero for incomes less than $65,000.

And what happens to the extra income?

The funds from the above tax cuts on incomes up to $50,000 for single tax-payers (and up to $65,000 for one-income families with dependent children) go directly into compulsory savings accounts for all employed workers. They are supplemented by an individual’s own, and their employer’s, contributions. Single tax-payers contribute 5% of earned income up to $50,000 (or up to $65,000 for one-income families with children). Their employer pays another 12½% of income up to $50,000. These contributions add up to total compulsory savings of $17,500 per year for those earning $50,000 or more (and $22,750 for a one-income family with children on
$65,000 or more). The savings are used to pay for one’s health and other welfare expenditures.

They propose 45% of the compulsory savings for an individual be reserved for healthcare expenses.

It’s a bold reform proposal which I’d love to see implemented in New Zealand. I look forward to seeing the final version of their paper published,