Universal Child Benefit

This post is by PaulL, a regular commentor and occasional contributor.   It is the tenth post in a series on the financial incentives to work and the impacts of our tax and transfer system on household formation, and the third post on the “what could we do” subsection.  The index to all posts in the series can be found here.

If we can’t afford a full UBI, can we perhaps afford something else universal?  From the earlier analysis we know the effective marginal tax rates are worst for those with children, because we have a number of targeted programmes that help those with children. Could we make the child-centred bits of the tax and transfer system universal?

We also know that the impacts can be worst on mothers looking to return to work, and that this impacts their lifetime earnings and our gender equity.  Personally I think it’s OK if a family/household chooses that one partner will earn less over their lifetime and look after the children.  I also recognise that partner will often be the mother, and many of the mothers I know are pretty happy about that – they’d rather look after the kids.

The key is that it should be a choice.  You should also be able to choose to work, and I know plenty of mothers who don’t want to be home with the kids.

We already have a lot of universal programmes around children.  Education is free up till end of high school for all families, irrespective of income.  Healthcare visits are free for all kids up to a certain age.  Early childhood education is free for 20 hours per day after your child is 3.

We also have quite a few targeted benefits – working for families plus a few other allowances.  We spend $2.6 billion a year on working for families, this goes to those in work and those on a benefit.  Those on a main benefit get an uplift if they have children.

The existing payments for children that impact upon abatement rates are:

• The main benefit delivers roughly $125 additional per week if you have children
• Family tax credits deliver $125 for the first child, then $105 for each child thereafter 
• In work tax credit delivers $72.50 for up to 3 children, and $15 for each additional child, if you’re not getting any residual benefit and working at least 20 hours per week (so you never get this and the benefit listed above at the same time)
• Child care support if you are in work and your child needs child care (i.e. you work enough hours and your child is not in school or ECE that is already funded)

What if we replaced all these payments with a universal payment that went to everyone with children, irrespective of income?

We’d remove a lot of abatement rates that primarily impact people with children.  WFF reaches a long way up the income ladder anyway, up to around $150K of family income in many instances.  Younger people tend to have children (not exclusively), and younger people tend to earn less.  Making these entitlements universal may not greatly impact how much we’re spending, and it could be immensely politically popular with middle class 30-50 year old pakeha voters – in other words, swing voters.

What would such a programme look like?  

We would replace all benefits and programmes that are targeted based on how many children you have with a single set of payments.

1. Anyone with a child gets $125 a week for the first child, then $105 for each child thereafter.  No abatement rates.  There are 1.28 million children, assume an average of $113 each, this costs $7.5 billion.  We can offset $2.6 billion from existing WFF, and some portion of current benefit payments, assume another $1 billion.  Net additional cost is $4.5 billion a year
2. Everyone gets paid parental leave out to 12 months, it can be split between parents but must total 12 months.  Scandinavian countries do something like this.  It keeps women connected to the workforce, they’re more likely to return to work if there’s a job waiting.  This is a big impost on employers, so we’ll make the increment over today’s parental leave government funded (with some income caps etc).  No idea what this costs, call it $1 billion a year.
3. Everyone who works hours that require child care gets that child care paid for at a rate that is sufficient to get reasonable quality child care – based on actual child care costs (i.e. if you find cheaper child care the govt only pays the cost – you can’t make profit on it).  Again no idea what this costs, but we currently spend $145 million on childcare assistance to those in work, and most kids are in ECE or school, so let’s assume this is another $500 million

So this package will cost up to $6 billion per annum.  The cost of reducing the top tax rate from 39% back to 33% is around $2 billion per annum, the operating allowance is $4.5 billion per annum.  This is within the realms of possibility for the kinds of money we’re looking at spending.

Let’s examine what this would do to EMTRs.

Previously we calculated the EMTR for a sole parent with two children as follows:

With the new policy their income looks much better beyond around 30 hours of work a week, once the main benefit finishes abating.  Remember it’s the red line we care about.

We do still have a massive flat spot while the main benefit abates at 70% then the accommodation supplement abates, plus tax on income of 18%, giving a net EMTR of 75% from 11-30 hours of work.  Above 30 hours of work we’ve made quite substantial inroads into the incentives to work.  I think this is better than it was, but realistically a solo mother with 1 child under 5 is unlikely to work more than 30 hours a week.  So we’ve made a portion of the income continuum better, but probably not a portion that a lot of people are in.

If we consider instead a household with two parents, one not working and one working $25 per hour, we have made better improvements.

Previously this household had no real incentive for the second parent (probably the mother) to work:

With the changes we’ve made a much stronger incentive for the second parent to enter work:

The returns are always positive, with a net govt clawback and expenses of 55% up to 22 hours of work, then 30% beyond.  This is a substantial improvement.

I like this policy, I think it could be very politically popular, and it makes a meaningful difference.  But really it’s addressing the disincentive to work for second parents in a household with children, basically undoing the work incentive damage done by WFF by making it universal.  This is useful from the perspective of women’s lifetime income and the gender pay gap.  I’m not sure it’s our highest priority though – I think sole parents are probably a bigger area of concern.

So, progress, but not enough yet.