Targeting Families’ Assistance: Evaluating Family and Employment Tax Credits in New Zealand’s Tax-Benefit System

Abstract

In 2004 the Labour-led government announced a series of tax-benefit reforms (the Working for Families reforms) that will account for an estimated $1.17 billion per-annum of new spending when fully implemented by 1 April 2007. These reforms aim to both reduce rates of child poverty and improve financial incentives for paid work at low wages, particularly for caregivers. Changes to family and employment tax credits (the Family Assistance programmes) are central to these reforms. This study reviews methods for measuring the effectiveness of family and employment tax credits, evaluates the Working for Families reforms, and considers possible improvements to Working for Families. Questions that this study considers are: What roles should family and employment tax credits play in tax-benefit systems? How should family and employment tax credits be designed? Should eligibility for assistance reflect work effort as opposed to family structure? What lessons do historical and comparative perspectives on Working for Families provide? Will New Zealand's Working for Families reforms achieve the optimal design and role of family and employment tax credits? What improvements, if any, could be made to the Working for Families reforms? This study concludes that the Working for Families reforms represent significant income redistribution towards families with children but little change will be made to the overall design of the Family Assistance programmes, some of which have remained largely unchanged since 1986. Working for Families does not fully address the need to reform the Family Assistance programmes in the light of important social and economic changes that have taken place over the last two decades, such as the breakdown of the breadwinner model of social arrangements and the liberalisation of the labour market. This study thus considers a number of improvements to Working for Families, ranging from simplifying the structure of the Family Assistance Tax Credits to a more radical redesign of these programmes. This study concludes that more clearly established policy priorities and a greater understanding of the relative effectiveness of different tax-benefit instruments are required if New Zealand is to develop a tax-benefit system that achieves a desired level of redistribution to families with children at least economic cost.