Opinion & Commentary
People should be able to opt out of welfare entitlements in return for tax reductions
In 1970, taxes consumed one-fifth of everything New Zealand produced. Today taxes absorb one-third of it. If things go on like this, the government will be soaking up half of everything we produce by the middle of this century.
The main cause of escalating government spending is the welfare state (cash benefits, plus government services like health and education). Welfare state expenditure keeps rising and now accounts for nearly three quarters of the government’s budget.
Many people approve of increased government spending on things like health, education and family payments, and most of us think the government should support people who cannot look after themselves. But much of the money spent on today’s welfare state does not go to people who need help. It goes to people who could fend for themselves, if only their tax burden were lower.
New Zealand led the world in creating the welfare state. A century ago groups like the elderly, widows, and unemployed workers led vulnerable lives, and government assistance helped them avoid destitution. Back then, few families could afford to save for retirement, buy adequate health cover, or insure against loss of income.
But the world has changed in the last hundred years. We are now much richer and people’s purchasing power is much greater. More of us should therefore be in a position to buy services which earlier generations could not afford. Yet as the need for assistance has declined, government spending has increased. The explanation lies is in the growth of tax-welfare ‘churning.’
The original welfare state operated like Robin Hood, taking money from the rich and using it to help the poor. But the modern welfare state operates more like a giant piggy bank, taking money from ordinary people and then giving it back again.
Many people today pay high taxes only to get much or all of their money back as government payments and services. More than half of all welfare state spending is churned in this way. This means a lot of the tax we pay does not go to people in need, but finances our own benefits and services, now or in the future. It would make more sense if the government left this money in our pockets so we could spend it ourselves.
Tax-welfare churning is inefficient (it costs money to collect all that tax and then give it back again). It also creates work disincentives by driving tax rates higher than they need be. But the biggest costs are social, for when government takes away our money and then gives it back, it disempowers us by stripping us of the means for taking responsibility for our own lives. Churning creates a culture where people lose the habit of self-reliance and start to expect government to solve every problem for them. This in turn politicises everyday life as people squabble over who should get what.
To reduce tax-welfare churning, while ensuring that everyone is guaranteed a decent, basic living standard, three policy changes are needed.
First, nobody should pay tax until they have earned enough to cover their own basic needs. This requires a tax-free earnings allowance equivalent to the minimum income people get on welfare – about $11,500 for a single person and $19,000 for couples opting for joint taxation.
Secondly, workers should make tax-deductible annual contributions into special personal savings accounts so they do not have to rely on government assistance when their employment is temporarily interrupted by unemployment or sickness. To start them off, the government should denationalise its Superannuation Fund and redistribute the money, giving everybody an initial $3,000 deposit in their account.
Thirdly, taxpayers should have the right to opt out of government health and/or superannuation in return for tax reductions. The tax saved would go into their personal savings accounts to pay for routine medical expenses, buy health insurance, and to provide a retirement income.
What do we want New Zealand to look like in mid-century? Do we want government absorbing half of everything we produce with large swathes of the population depending on its hand-outs? Or would we prefer an affluent country where most people manage their own affairs without having to rely heavily on government to provide them with what they need? If the answer is the latter, we have to start making changes now to set the foundations for a more responsible and freer country in fifty years time.
Professor Peter Saunders is social research director at the Centre for Independent Studies.
