2.3.4  Case Four: A Single-Income Couple With Two Children

Figures 14 and 15 show EMTR profiles and budget constraints of a person with two children (aged six and nine) and a non-working partner based upon the family’s combined income and the different sources of this income (market incomes earned by both parents and Family Assistance and welfare payments). Figure 14 is based on an assumed wage rate of $10 per hour and figure 15 is based on an assumed wage rate of $15 per hour. Net family incomes are shown on the vertical axis at the left of the figure. EMTRs are shown on the vertical axis at the right of the figure. Hours of work are shown on the horizontal axis of the figure. The extent that personal income taxes reduce gross total family income is also shown in the figures. Vertical lines in the diagrams indicate the hour levels corresponding to personal income tax thresholds applying to the market income of the spouse whose hours vary. However, for couples the thresholds applying to personal income tax rates on total individual gross income are not necessarily equivalent to these lines. This is because total individual income for tax purposes includes both individual market income and one half of the family’s gross benefit income.

Figures 16 and 17 show the frequency distributions of the hours of work of individuals who are members of single-income couples with two or more children. 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 16 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 17 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 $17.65 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 distribution of hours of work and the distribution of incentives would be likely to arise.

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 initially 16.2%, which is a combination of the personal tax scale, the Low Income Earner Rebate, and the ACC earners’ levy. The EMTR then increases to 22.2%, when the personal income tax rate facing the working spouse increases to 21% (this occurs at the point at which the working spouse’s non-benefit income plus half of the family’s benefit income exceeds $9,500).

This 22.2% EMTR continues until the family’s total gross income (including market and benefit income) equals $20,000. At this point the Family Support Tax Credit begins abating against increases in gross total family income at 18%. The EMTR increases by 18% to 40.2%.

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.)

The EMTR remains at this rate until the Unemployment Benefit is fully abated. When the benefit is fully abated the family begins to receive the Child Tax Credit. This payment is added together with the Family Support Tax Credit and it is this total figure that abates. There is thus a reduction in the disincentive to supply labour above this point (although this is weakened by the abatement of the Family Support and Child Tax Credits). At this point the EMTR is a combination of the personal income tax scale, Low Income Earner Rebate, ACC earners’ levy, and Family Assistance abatement. The EMTR thus falls to 40.2% (given by 0.21 + 0.012 + 0.18).

When the family’s gross income increases to $27,000 the abatement of the Family Assistance programmes increases to 30% and the EMTR increases to 52.2%. When the Family Assistance programmes are fully abated the EMTR is based on only the personal income tax scale, Low Income Earner Rebate, and ACC earners’ levy.

A person in a couple with two children (under 13) and a non-working spouse receiving the Unemployment Benefit has little incentive to undertake more than around 8 hours of work at $10 per hour (or around 5 hours of work at $15 per hour). It is not until around 49 hours of work at a wage rate of $10 per hour (or at 32 hours at a wage rate of $15 per hour) that the benefit is fully abated. There is thus a reduction in the disincentive to supply labour only above this point.

The frequency distribution of hours of work for single-income couples with two children and hourly wages below or equal to the median for the demographic group ($17.65) indicates that relatively small numbers of people in this demographic group 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. Further, reflecting the relatively flat nature of the budget constraint between the point at which the benefit begins abating at 70% and the point at which the benefit is fully abated, relatively few people who work locate at the point below which the benefit is fully abated. There is a mode at around 45 hours that reflects the change in the slope of the budget constraint when the Unemployment Benefit becomes fully abated and the family becomes eligible for the Child Tax Credit. Large proportions of people in this demographic group work around 45 hours per week or above and thus do not face the relatively high EMTRs that arise below this point due to the abatement of the Unemployment Benefit. The incentives that arise from the personal income tax scale, Low Income Earner Rebate, and abatement of the Family Assistance programmes are relatively significant for people who work these hours.

As with the frequency distribution of hours of work for single-income couples with two children and hourly wages below or equal to the median for the demographic group ($17.65), the frequency distribution of hours of work for single-income couples with two children and hourly wages above the median for the demographic group demonstrates a mode at around 45 hours. The mode at around 45 hours is above the abatement of the Unemployment Benefit and thus is more likely to be influenced by the personal income tax scale and Low Income Earner Rebate and abatement of the Family Assistance programmes. Large proportions of people in this demographic group work around 35 hours per week or above and thus do not face the relatively high EMTRs that arise below this point due to the abatement of the Unemployment Benefit. The incentives that arise from the personal income tax scale, Low Income Earner Rebate, and abatement of the Family Assistance programmes are relatively significant for people who work these hours.

Overall, few people seem to locate in the abatement-free zone for the Unemployment Benefit, but there may be a large number of people at zero hours of work who could nevertheless be affected by any change to this zone. The lower the hourly wage the greater the significance of the abatement of the benefit and the abatement-free zone for financial incentives. Large proportions of people in this demographic group face incentives that arise from the personal income tax scale, Low Income Earner Rebate, and abatement of the Family Assistance programmes.

In comparison to other family types, the numbers of people in both distributions of single-income couples with two children are relatively small (although larger than the equivalent distributions of sole parents). Significant numbers of the income earners in these families who work at wage rates below or equal to the median hourly wage work for around 45 hours per week or more. Significant numbers of the income earners in these families who work at wage rates above the median hourly wage work for around 35 hours per week or more.

Figure 14: EMTR Schedule and Budget Constraint of a Person with a Non-Working Spouse and Two Children (Under 13) and with a Wage Rate of $10 per hour

Figure 15: EMTR Schedule and Budget Constraint of a Person with a Non-Working Spouse and Two Children (Under 13) and with a Wage Rate of $15 per hour

Figure 16: Frequency Distribution of Hours of Work of People with a Non-Working Spouse and Two or More Children (Wages up to and including Median ($17.65) for Group)

Figure 17: Frequency Distribution of Hours of Work of People with a Non-Working Spouse and Two or More Children (Wages over Median ($17.65) for Group)