Susan St John: Cullen has done well in evening things up

COMMENT

What a dilemma Bruce Logan, of the Maxim Institute, faces. His ideology requires him to support the concept of helping families at the same time as denigrating the only feasible way to do it.

Like others of his ilk, he thinks the only proper tool is to cut the basic tax rate. "Leave families with more of their own money," the catchcry goes. Anything that is not a tax cut will "disempower" and "increase state control".

Surely we have outgrown this arid and unimaginative view of taxes and the role of the state. The truth is that the angst he feels about the Budget "handouts" can be assuaged easily with a little bit of tax theory, all highly conventional and conservative.

It goes like this. Horizontal equity requires that taxpayers with the same ability pay the same tax. A family with children does not have the same ability to pay tax as a single person on the same gross income. For example, equivalence studies shows that a couple with four children needs over 2 1/2 times as much disposable income as a single person to be as well-off.

The horizontal equity principle has been largely forgotten here. By the time a two-adult, one-child family reaches the low income of $34,000, less than the average wage, they pay the same tax as a single person.

In other developed countries, adjustments to achieve some degree of horizontal tax equity are an accepted part of the tax system. For instance, in Australia a family of three children on $88,000 was getting a $66 family tax benefit a week even before the new increases announced in that country's latest Budget.

There are three possible ways to achieve horizontal equity. It can be delivered through a universal family benefit, but this tends to be too expensive if it is at a high enough level.

Another, more old-fashioned, method is to give child tax exemptions, but these are of the greatest benefit to those on the highest incomes - hence they are not cost-effective.

That leaves tax credits, which are flat amounts, either the same for all or reduced at higher income levels. This is what New Zealand does through family support tax credits.

Can we have it writ large? Tax credits offset tax paid and achieve horizontal equity; they are not a welfare handout that saps initiative and creates dependence.

At long last the Budget has increased family tax credits, but Mr Logan worries that we might not be able to afford them in five to 10 years.

Never fear, if we cannot afford them, we won't be able to afford pensions, health care and fundamental social services - or much else, either.

Let's not see the sky falling in now just because some families with children will be stopped from moving ever backwards, while the top deciles of wealth and privilege continue to gain.

Without any figures to justify the statement, Mr Logan says that "a family on $55,000 a year would be better off paying less tax than getting their own money back from the state in the form of a welfare cheque". He appears to favour an 18 per cent flat tax.

Under this proposal, the family of six would still end up with the same disposable income as the single person but get far less than the Government has promised them in the Budget.

Worse still, we would join the race to a Third World-status economy, with private health insurance, private education for the rich, and ever-deteriorating social and economic infrastructure for the poor.

Mr Logan claims that "just as a Christmas pet is forever, so are the expectations of people once they have been handed a new social entitlement". Replace "social entitlement" with "tax cut" and the same point applies.

Again he worries: "If there should be a downturn in the economy, what happens then?" Well, instead of the economy crashing into a 1991 recession, we now have some hope of providing a cushion by holding up family income and preventing relentless poverty.

He thinks the National Government was unfairly hated in 1991 for its benefit cuts. Let's hope we have learned from Ruth Richardson's disastrous mistakes in using the poor to balance the Budget. Can we forgive the dramatic rise of the foodbank industry, a shameful rise in Third World diseases in our hospitals, and lost life chances for nearly a third of New Zealand children?

Mr Logan points to that tired old canard of the right, that the size of the state at 40 per cent of the economy has undermined economic performance.

This measure is misleading. For instance, tax credits and tax cuts both reduce tax paid, but only the first makes the state look bigger.

For a small economy and dispersed population, the Government does remarkably well, and we can hold our own in international comparisons on tax and spending.

* Dr Susan St John is a senior lecturer in economics at Auckland University, and an executive member of the Child Poverty Action Group. She is responding to Bruce Logan's view that the Budget failed to move New Zealand from a dependency mindset towards a low-taxation, high-productivity culture.