Should the childless pay more tax?

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“Labour’s Best Start package will give 26,000 families more time with their babies, provide up to $60 a week extra for over 100,000 children, mainly in modest and middle income families, and give many families with a child in Early Childhood Education $25 each week…. The fiscal impact of the Best Start package is estimated at $530 million in 2018/19, the first year of full implementation,”

More children, more tax breaks

It’s an old argument and, because it’s election year, the debate is again on the agenda.

Before you discount the question, let’s explore the pros and cons. 

Rearing future taxpayers

The childless - or “childfree” - are not contributing to the pool of future taxpayers. They can earn more during their working lives as they are not burdened with the costs of raising and educating future taxpayers. 

The childless can save more for retirement as well as enjoying a higher standard of living. 

So are we to agree childless people are the free riders and the case for taxing them at a higher rate is a slam dunk?

This is not just an emotional argument. The economic reality is our population is aging and the pool of future taxpayers is decreasing. In the future, we will have more people living off taxpayers, than contributing to the tax take.  

Do we scoff at Labour’s ‘Best Start’ proposal of $60 a week for all families on household incomes of under $150,000 a year? Or complain persistently about extending paid parental leave or the existing Working for Families? 

At the extreme, should childless people start forming a union to protect their rights and lodge a discrimination case with the Human Rights Commissioner? 

Raising the fertility rate

Higher taxes on childless people could force a change of attitude.

In the same way higher taxes on tobacco, discourage people from smoking, could Labour’s scheme encourage a change of status from childless to with child? 

Taxing the childless is not a perfect solution.

  • 75% of New Zealanders pay, on average, only $2750 tax a year
  • The number of households receiving more income support than they pay in tax is 43%
  • About 10% of our households pay 70% of our personal taxes  
  • Working for Families costs around $2.6 billion a year - more than the government spends on communications and transport

Thanks to our existing taxpayer-funded concessions (working for families, paid parental leave etc), this group already pays a higher rate of tax.  

Targeting maximum votes

If Labour becomes the government, higher income earners can look forward to paying even more taxes and, no doubt, funding more child-friendly policies. 

While it is politically opportunistic to offer more money to those who need it, this is unlikely to provide a solution that suddenly sees fewer people on the poverty line or more people breeding future taxpayers. 

Unless we want a mass exodus from NZ of childless people, there must be a more multi-faceted approach. Part of this will be a robust plan to target extra tax dollars.

The cash economy problem

The obvious hole in our tax take is the cash economy. For NZ this is estimated to be $7.1 billion a year – or 12.4% of our gross domestic product (GDP).  This equates to 44% of New Zealand’s annual health budget. 

Tax evasion is a world-wide problem. New Zealand is ranked at 51 of 145 countries. Globally, tax evasion represents around 5.1% of GDP so NZ is at the high end. There are all sorts of excuses, such as helping those who are struggling to survive. But tax evasion puts added pressure on taxpayers (even the childless), who willingly pay their fair share of tax.  And those who evade tax also qualify for higher government funded hand outs.

Boosting the tax take will be a major challenge for the incoming government – whoever it night be. Cracking down on the so-called “black economy” is an obvious place to start.

Jo Doolan is a Partner with EY. The views expressed are her own and do not necessarily represent those of EY.