2.3  Effective Marginal Tax Rate Profiles and Family Budget Constraints

EMTR profiles and budget constraints of five different family types for two different wage rates are discussed below. These different family types are based on the cases of:

• a single person without children (at wage rates of $10 and $15 per hour);
• a sole parent with one child (at wage rates of $10 and $15 per hour);
• a person with a working partner and without children (at wage rates of $10 and $15 per hour);
• a person with a non-working partner and two children (at wage rates of $10 and $15 per hour); and
• a person with a working partner and two children (at wage rates of $10 and $15 per hour).

These profiles are based on the 2003-04 social assistance system.

EMTR profiles and budget constraints, along with the behavioural responses that result from them, differ among people with different characteristics, depending on factors such as hours of work, wage rates received, marital status, number and ages of children, availability of childcare, accommodation needs, and receipt of other assistance. Findings based on these five family types should thus also be assessed against the degree to which these family types are representative of the general population or of those receiving income support. With this in mind this section also considers effective marginal tax rate profiles and budget constraints in the light of data on the frequency distribution of hours for various wage rates of various demographic groups.

2.3.1  Case One: A Single Person Without Children

Figures 2 and 3 show EMTR profiles and budget constraints of a single person without children based upon the person’s income and the different sources of this income (market income and welfare payments). Figure 2 is based on an assumed wage rate of $10 per hour and figure 3 is based on an assumed wage rate of $15 per hour. Net incomes are shown on the vertical axes at the left of the figures. EMTRs are shown on the vertical axes at the right of the figures. Hours of work are shown on the horizontal axes of the figures. The extent that personal income taxes reduce gross income is also shown in the figures. Vertical lines in the figures indicate the hour levels corresponding to personal income tax thresholds applying to market income.

Figures 4 and 5 show the frequency distributions of the hours of work of single people without children.[11] These figures exclude those people with zero hours of work. Given that there are likely to be few observations of particular family types at certain wage rates, wage bands (of below and above median wages for particular demographic groups) have been used to calculate the frequency distributions of hours of work. Figure 4 shows the distribution of hours of work for those people receiving wage rates up to and including the median wage rate for this demographic group. Figure 5 shows the distribution of hours of work for people receiving wage rates above the median wage rate for this demographic group. The median wage for this demographic group is $14.04 per hour. As the median wage differs from the wage rates assumed in the calculation of EMTR profiles and budget constraints, some variance in the measured distribution of hours of work and the measured distribution of incentives would be expected.

The net Unemployment Benefit abates at a rate of 70% against increases in gross non-benefit family income above $80 per week ($4,160 per annum). In the $80 abatement-free zone the EMTR is 22.2%, which is a combination of the personal tax scale, the Low Income Earner Rebate, and the ACC earners’ levy.

Once the $80 threshold is reached the net Unemployment Benefit abates at a rate of 70% against increases in gross non-benefit earnings. The gross benefit is above $9,500 so the marginal tax rate on benefit income is 21%. The gross benefit abatement is 0.886 (given by 0.7 / (1 – 0.21)), the change in gross income is 0.114 (given by 1 – 0.886), the change in disposable income is 0.078 (given by 0.114 (1 – 0.21)– 0.012), and the EMTR is thus 92.2%. (The method for calculating EMTRs is explained in appendix 3.)

When the tax on the benefit falls, the gross benefit abatement is 0.824 (given by 0.7 / (1 – 0.15)), the change in gross income is 0.176 (given by 1 – 0.824), the change in disposable income is 0.127 (given by 0.176 (1 – 0.21) – 0.012), and the EMTR is thus 87.3%.

A single Unemployment Benefit recipient without children has relatively little incentive to work for less than 30 hours per week at $10 per hour (or 20 hours per week at $15 per week). However, once the benefit is fully abated these disincentives to supply labour no longer apply. The higher the hourly wage the smaller the range of hours of work over which labour supply is discouraged.

As the median wage differs from the wage rates assumed in the calculation of EMTR profiles and budget constraints, some variance in the measured distribution of hours of work and the measured distribution of incentives would be expected. In spite of this, however, the financial incentives from social assistance programmes do appear to play an important role in influencing the frequency distribution of hours of work of different demographic groups.

A relatively small proportion of single people without children with hourly wages equal to or below the median for this demographic group ($14.04) locate in the abatement-free zone. The earlier data on the distribution of EMTRs among beneficiaries, however, suggests that there could be a significant proportion of beneficiaries with zero hours of work. The small mode at around 15 hours is around the point at which the Unemployment Benefit abates at 70% and reflects the relatively flat segment of the budget constraint that results from this abatement. Large proportions of people in this demographic group work 30 hours per week and above (there is a large mode at around 45 hours) and thus do not face the relatively high EMTRs that arise from the abatement of the Unemployment Benefit below this point. Incentives that arise from the personal income tax scale and Low Income Earner Rebate are thus relatively significant for people who work these hours.

As with those single people without children with hourly wages equal or below the median, a relatively small proportion of single people without children with hourly wages above the median locate in the abatement-free zone. The small mode at around 15 hours is around the point at which the Unemployment Benefit abates at 70% and reflects the relatively flat segment of the budget constraint that results from this abatement. Most people in this demographic group work around 20 hours per week and above (there is a large mode at around 45 hours) and thus do not face the relatively high EMTRs that arise below this point, as the Unemployment Benefit is fully abated at around 20 hours of work per week. Incentives that arise from the personal income tax scale and Low Income Earner Rebate are thus relatively significant for people who work these hours.

Overall, few people seem to locate in the abatement-free zone for social welfare benefits, but there may be a large number of people at zero hours of work who could nevertheless be influenced by any change to this zone. Further, small modes at around 15 hours per week reflect the relatively flat segments of the budget constraints due to the 70% abatement of the Unemployment Benefit. This mode is more significant for those people earning hourly wages below or equal to the median than it is for those earning hourly wages above the median. The lower the hourly wage the greater the significance of the abatement of the benefit and the abatement-free zone for financial incentives. For both distributions, the majority of the population were above the abatement of the benefit with large modes occurring at around 45 hours, thus making the incentives from the personal income tax scale and the Low Income Earner Rebate relatively significant for these people.

In comparison to other family types, the numbers of people in both distributions of single people by hours of work are relatively large. Significant numbers of single people without children who work do so for 30 hours or more per week.

Figure 2: EMTR Schedule and Budget Constraint of a Single Person without Children and with a Wage Rate of $10 Per Hour

Figure 3: EMTR Schedule and Budget Constraint of a Single Person without Children and with a Wage Rate of $15 Per Hour

Figure 4: Frequency Distribution of Hours of Work of Single People without Children (Wages up to and including Median ($14.04) for Group)

Figure 5: Frequency Distribution of Hours of Work of Single People without Children (Wages over Median ($14.04) for Group)