Comment

Working for Families is corporate welfare

Working for Families has become a subsidy scheme for employers who can’t, or won’t, pay adequate wages, argues Bryce Edwards

As of last week, the Government is pouring $370 million more this year into Working for Families (WFF), further entrenching a system which has many critics across the political spectrum.

On the political right, the criticism has always been that the scheme is creating a nation of welfare beneficiaries. After all, it’s regarded as extraordinary that families earning around $100,000 qualify for WFF payments. However, these are effectively tax credits for people with children (which is very common among the OECD nations).

It is even more problematic at the lower income end, where full-time workers not only will often pay no tax, but effectively receive additional tax credits – welfare by any other name. So, state income assistance is being given to those that are fully engaged in the workforce – which, by historical standards, seems contradictory.

The criticism from the left has often been that the very existence of WFF indicates that many working families are not able to support themselves without quite large taxpayer assistance. The accusation is that employers of low-paid workers are effectively being subsidised by WFF.

This has parallels with other modern welfare initiatives – such as the accommodation supplement, which is a subsidy paid by the state to private landlords of those tenants on low incomes. The left blames such payments for contributing to the rapid increases in rentals, because it effectively allows landlords to increase rents for low-income tenants beyond what they can actually pay.

Alternatives to Working for Families

What’s the alternative to welfare that subsidises the corporates? Ideally, wages simply need to increase, so that workers have enough to live on. To some extent, the new Government is pursuing this objective with its commitment to increase the minimum wage for those at the bottom – with it going up by $4.25 by 2021.

Of course, this will cost the Government itself, as it will have to lift the wages of many of its own employees receiving the minimum wage. Yet overall, the increase in the minimum wage is going to lead to a saving for the Government, as the wage increases will result in a reduction in tax credit payments made through WFF – because, generally, the more an individual earns, the less they receive in WFF payments. Therefore, the recently-expanded entitlements for WFF are actually going to be partially afforded by the savings caused by the minimum wage increases.

Nonetheless, we clearly need to a have a debate about whether a family whose income is derived from wages and salary should be able to pay its own way without other tax payers subsidising them. Of course, such survival from working needs to include criteria such as being able to maintain key assets like vehicles and appliances, and not involve getting into debt to do so.

Currently, a “typical” family with two parents working minimal wage jobs – $16.50 per hour – essentially pays no tax and gets a subsidy. Take a family household with two adults and two children, an eight year old and a 10 year old, with one full time and one part-time job, totalling 60 hours paid. They would have an annual income of $51,480, and a tax bill of $7,049. But WFF means that they would get tax credits of $12,116 ($233 a week), effectively pay no tax and receiving an additional annual taxpayer subsidy of $5,067.

Even if this family earned the “Living Wage” – currently $20.55 an hour, which is claimed to allow a family of four to live reasonably (i.e. not just hand to mouth) – there is still a huge taxpayer subsidy. 60 hours paid work equates to a household income of $64,116 per year and their weekly family support would be $169, almost $8,800 a year. Given their total tax is $9,260, they are effectively paying only $472 in tax a year – $9 a week.

So who is really getting subsidised?

One test of the impact of a policy is to look at what would happen if it wasn’t in place. Short term, obviously low-income families would be hit hard if WFF no longer existed. But, beyond that, it’s clear that wages for the lowest paid would have to rapidly increase, otherwise a huge proportion of the workforce would simply not be able to meet their basic costs. Just affording to get to work would be a problem, with higher housing costs pushing workers further and further away from their work locations. Rents at the lower end of the market would likely also fall rapidly, particularly in the bigger cities.

Hence, just as landlords are very happy with Governments providing the accommodation supplement, which pushes up rentals, and allows more tenants to be able to afford to rent from them, employers are very happy with WFF, as it means that they can continue to pay low wages. Without WFF – and other welfare schemes like the accommodation supplement – many workers would simply not be able to live in many of the cities where employers need workers. There would be massive labour shortages, or wage rates would need to increase – or both.

On the political right, the argument in the past has been that converting WFF into tax cuts would be the simplest way to return taxes to workers. However, given the low levels of wages and the low levels of taxes paid, even if the Government was to give low income workers a 100 percent tax cut, this would not actually replace the income lost for those currently working for less than $20 an hour. And, of course, unless there is an increase in the higher marginal tax rates, those who earn the most always get more tax from tax cuts than those on lower incomes.

However, there are fewer voices attacking Working for Families these days – and the Act Party is now the only voice in Parliament which still opposes the scheme. National have said their proposed tax cuts would be better than the WFF increases of this Government – but it is notable that in nine years in office National maintained the scheme in its entirety.

Lately, the line from many employers has been that they would prefer to see WFF increases than increases in the minimum wage. Their public reasoning is that workers with families will lose some benefits if their wages increase. What they don’t mention is that increases to the minimum wage transfers income support costs from taxpayers to employers, while WFF increases do the reverse. Quite simply, most employers have become enthusiastic about WFF, and any increases to it are actually quite welcomed.

When Labour first introduced WFF it was slammed on the political right as “middle class welfarism”. Now, it’s acceptance across the political spectrum indicates the welfarism has spread beyond even the middle classes.

Living in the age of “corporate welfare”

We are living in the age of corporate welfare – where increasingly much of the spending of the state is about subsidising the operations of business. At a very overt level, tax credits for overseas film makers to make productions here are seen for what they are: subsidies. And such schemes are becoming increasing criticised. Yet Governments of both left and right continue with them.

There’s plenty of other blatant examples of subsidies for businesses, whether it’s schemes for Saudi sheep farmers, or land tenure review in the high country which has amounted to a massive transfer of wealth to large landowners.

Yet these more prominent versions of corporate welfare are tiny in comparison to the less direct form of “welfare” that benefits corporations – the Working for Families scheme, which of course was introduced by the Clark Labour Government, maintained by the Key Government, and now expanded again by the Ardern Government.

All these years later, it’s become much clearer as to who benefits from the scheme. John Key famously called it “communism by stealth” when he was Leader of the Opposition, and then adopted the policy for himself. But in 2018, perhaps it can finally be more credibly labelled as “corporate welfare by stealth”.