Could TOPs “free money” policy really work?

In 2004, John Key described Labour’s newly announced Working for Families programme as “communism by stealth.”

For younger readers, Working for Families was a major expansion of financial assistance to families introduced by Helen Clark’s Labour Government in the 2004 Budget. It increased family income assistance, added a new payment for working parents and expanded help with childcare and housing. By the time it was fully implemented, Labour expected the package to cost an additional $1.1 billion every year, with nearly 300,000 households receiving direct assistance.

The language was clever. Much of the assistance was delivered through Inland Revenue and described as “tax credits”, which sounds rather different from welfare. But Key’s argument was that the practical effect was straightforward redistribution. The Government was taking money through the tax system and transferring it to another group of New Zealanders, dramatically narrowing the difference in disposable income between people earning quite different amounts.

Hence, “communism by stealth”.

But there was another part of Key’s criticism which is particularly relevant today.

Because Working for Families payments reduced as household income increased, families could lose a substantial part of every extra dollar they earned through a combination of income tax and reduced tax credits. This acted as a disincentive to take on more work. Why would people work overtime if their ‘tax credit’ would be reduced? Why take weekend shifts? Why should a second parent increase their hours if most of the additional income would disappear through tax and lost assistance? Government had created an income-support system in which additional effort produced very little additional disposable income.

That’s the exact opposite of what New Zealand needs. A country struggling with weak productivity needs people to work more, produce more, earn more, invest more and build businesses. It needs people to see a clear financial reward from additional effort. Any system that weakens the connection between effort and reward pushes in precisely the wrong direction.

Despite this, four years later, as National leader, Key accepted that Working for Families would stay.

Why? Because the system had become embedded. Hundreds of thousands of families had arranged their household finances around those payments and removing them would have caused enormous disruption.

That is the nature of government entitlements – they’re considerably easier to introduce than remove – which should make us very nervous about The Opportunity party’s proposal to introduce what it calls a Citizen’s Income. Under this version of a Universal Basic Income, every eligible adult New Zealander would receive up to $370 every week, or $19,400 every year, irrespective of whether they were working. No unemployment requirement. No need to demonstrate hardship. No requirement to have children. Simply being eligible would entitle you to the payment.

Whatever ideological label its supporters want to attach to it, this is leftwing redistribution on a massive scale. Government collects resources from one part of society and redistributes them across another, except this time almost everybody becomes the recipient of a regular payment from the state.

But somebody has to pay for it – where does the money come from?

Opportunity proposes funding a substantial portion of it through a new Land Value Tax which would eventually reach 1.75 percent every year on urban land, with rural land taxed at 0.5 percent.

Over the past couple of weeks a number of people, including me, have pointed out just how massive that tax would become.

Take an Auckland home sitting on land worth about $1 million. At 1.75 percent, that’s roughly $17,500 every year.

Imagine a widow living in the mortgage-free house she and her husband spent 40 years paying for. The property may now be valuable, but that doesn’t mean she has another $15,000 or $20,000 of disposable income each year to hand to the Government.

Opportunity has thought of that and proposes to ‘allow’ superannuitants to defer the land tax until the property is sold.

How comforting.

But think about how large that debt could quickly become. At $17,500 a year, ten years represents $175,000. Fifteen years represents $262,500.

That’s more than a quarter of the original $1 million land value potentially consumed by a tax imposed on an asset somebody spent a lifetime accumulating.

At this point, Opportunity’s trolls usually appear on social media to reassure us that we shouldn’t worry because that same senior citizen will receive $19,400, through the Citizen’s Income to meet that bill.

Except this isn’t true. Opportunity’s own policy tells us that the Citizen’s Income replaces most existing benefits – including NZ Super. So the $19,400 isn’t a magical new payment sitting on top of NZ Super – it’s a replacement for almost all of it (which is why their ‘deferral’ policy is necessary).

And get this: Opportunity openly expects its land tax to reduce property values by around 10 to 15 percent – so homeowners will get the privilege of paying an enormous recurring tax on an asset that the party simultaneously wants to make less valuable.

Extraordinary.

Despite this – the policy still has its supporters. Free money has always been an excellent sales pitch and it’s easier to justify taking it when homeowners are being characterised as “wealthy property owners” finally paying their “fair share”.

But here’s where Opportunity’s own arithmetic becomes important.

The headline annual cost of the Citizen’s Income in its policy costing is around $69.6 billion – but the Land Value Tax is only forecast to raise only about $24.3 billion. Where does the rest come from?

That’s the bit that Opportunity and it’s social media trolls don’t usually tell you. In order to fund the Citizens Income Opportunity proposes establishing substantially higher headline personal income-tax rates of 28, 34 and 39 percent which assume that billions will be clawed back through income tax to help pay for it. But that still won’t raise nearly enough – so TOP also propose to abolish existing benefits like NZ Super, student assistance and other payments to squeeze more out of the public purse. Finally, Opportunity also proposes “administrative savings” of around $4 billion per year to make up the difference.

That’s a lot of assumptions – and some heavy hitters have challenged them.

Damien Grant has argued that Opportunity’s $69.6 billion Citizen’s Income calculation understates the eligible population, potentially pushing the gross cost closer to $80 billion, while its forecast $24 billion land-tax yield is hugely overstated.

Even independent critics sympathetic to tax reform have questioned how a scheme in which Opportunity’s own calculator produces so many apparent winners can simultaneously raise the enormous sums required to finance them. The New Zealand Initiative has raised precisely that problem.

But according to Opportunity, there’s no need to worry. The policy is “evidence based” (their mantra to make their various whacky ideas sound intellectual) and has been “tested overseas”.

Again, this isn’t true in the way that they attempt to portray it.

Let’s take a few of their own examples – starting with Finland as exhibit A.

Between 2017 and 2018, 2,000 unemployed Finns received €560 a month without the usual conditions attached to unemployment assistance. The programme was intended to determine whether a more generous benefit would assist unemployed Finns in getting back into work. It didn’t. In the first year recipients worked an average of 49.64 days, compared with 49.25 days for the general population. Essentially no difference.

But more importantly – this wasn’t a ‘national UBI’ as TOP claim. It was a small experiment which lasted 12 months and failed.

So what about the other supposed “success stories”?

Ireland? Its Government explicitly says its Basic Income for the Arts isn’t a Universal Basic Income. It’s a temporary programme for a small number of professional artists.

Alaska? Its annual payment of about $1,000 comes from accumulated oil wealth and is comparable to the dividend you receive from your Lines Company each year. That isn’t the same thing as imposing new taxes on citizens to fund universal payments.

Iran? Its cash payments were principally a compensation trade-off when energy subsidies were removed. It’s not a UBI and Inflation has subsequently eroded much of its value.

Mongolia? TOP cites this as one of the few countries to have actually implemented a UBI – and technically they’re correct – but it’s hardly a ringing endorsement of the concept. During the mining boom, universal payments became an electoral bidding war, politicians promised more than mining revenues could sustain, and the government borrowed to keep the payments flowing. When the boom faltered, deficits and debt surged and the scheme was eventually abandoned – making Mongolia less a UBI success story than a cautionary tale about what can happen when an entitlement becomes politically impossible to contain..

By contrast Switzerland actually put the idea of a genuine unconditional basic income to a national vote. The Swiss rejected it overwhelmingly.

So most of the examples held up as successful UBIs weren’t actually permanent national UBIs. They were experiments, targeted schemes, temporary payments or resource dividends. In fact, academic work reviewing the issue has explicitly observed that that there are no real world experiences of a genuine UBI operating in an advanced economy.

So New Zealand wouldn’t be following a successful international model – we’d be the guinea pig. And that brings me to perhaps the most extraordinary thing about this entire proposal.

With most major government policies, we have to wait years, sometimes decades, before we really understand the unintended consequences. With this one, we don’t.

Several consequences are already staring us in the face.

First, we know what happens to asset-rich but cash-poor retirees. Their NZ Super is wiped and most of the Citizens Income payment which replaces it is needed to pay the new land tax. Opportunity itself acknowledges the problem, which is why it needs a deferral mechanism. If they can’t pay it, the liability accumulates against their property – postponing collection of it until their home is sold or their estate settles the bill.

Second, for the rest of us, that’s thousands of dollars of extra tax – in the form of the Land tax and higher tax rates – that we would need to find every year (with no deferral available).

Third, we know there is a real risk to work and productivity. The evidence doesn’t show everybody stops working, but it does show that unconditional income can reduce labour supply at the margin, particularly as payments become larger. And somebody still has to perform the productive work and pay the taxes that support everybody receiving the payment.

Fourth, we know the scheme would become extraordinarily difficult to remove. Give almost every adult $19,400 a year and within a remarkably short period mortgages, rents, employment choices and household budgets will be built around it. A future government discovering that the scheme is unaffordable won’t simply be able to switch it off.

Fifth, we know New Zealand would be undertaking an experiment that no comparable developed country has successfully demonstrated at national scale. Despite TOPs claims, Finland didn’t do it. Ireland isn’t doing it. Alaska isn’t doing it. Switzerland rejected it. We would be gambling the structure of our tax and welfare system on something its advocates haven’t demonstrated works sustainably or successfully anywhere.

Sixth, we know the tax itself is intended to destroy part of the value of the asset being taxed. Opportunity expects land values to fall 10 to 15 percent. That means existing owners bear an immediate wealth effect while also becoming liable for the recurring annual tax.

Seventh, we know the system creates powerful incentives for avoidance and political exemptions. Opportunity already proposes exemptions and deferrals for various classes of land and taxpayers. Every exemption narrows the tax base, and every narrowing of the tax base increases the burden required from those left inside it.

And eighth, there is an enormous fiscal risk if Opportunity’s arithmetic is wrong.

Remember Working for Families – the package John Key attacked in 2004? It was expected to cost around $1.1 billion a year. Its main tax-credit components now cost roughly $3.7 billion annually.

Compared with Opportunity’s proposal, that’s chicken feed.

Opportunity itself puts the cost of the Citizen’s Income at almost $70 billion every year. Damien Grant argues the true number is closer to $80 billion and simultaneously questions whether the land tax will raise anything like the amount Opportunity expects.

If Opportunity has those numbers wrong, the difference doesn’t disappear. Somebody has to pay for it. Either taxes have to rise even further, spending elsewhere is cut, the Citizen’s Income is reduced, or the Government borrows the difference.

And we’ve just seen what excessive government borrowing can do. In its final years in office, Labour dramatically increased Crown debt. The additional borrowing and spending created an economic and fiscal crisis that we’re still dealing with and which has been a major contributor to higher interest costs, tighter fiscal policy and a prolonged economic downturn.

We’re talking about roughly $60 billion of additional debt over that period, and we’re still dealing with the consequences.

Now imagine getting the arithmetic on a $70 billion to $80 billion annual entitlement wrong.

A $5 billion annual shortfall becomes $50 billion over a decade before financing costs.

A $10 billion shortfall becomes $100 billion.

And unlike emergency Covid spending, this doesn’t disappear when the emergency ends.

It’s permanent.

That’s what makes the scale of the proposed gamble so breathtaking. A relatively small forecasting error, repeated year after year, could make the additional debt accumulated under the last Labour Government look like kindergarten.

And all of this is before considering the wider effect of an annual 1.75 percent land tax on investment decisions, capital allocation, retirement planning and whether internationally mobile New Zealanders decide that this remains the country in which they want to build and hold their wealth.

The consequences aren’t some distant academic possibility that we’ll discover in 30 years.

The warning lights are already flashing.

John Key understood part of this problem in 2004. Once government creates a widespread cash entitlement, people become dependent upon it and politicians become terrified of removing it.

Working for Families demonstrated that dynamic with one section of the population.

Opportunity proposes extending it to almost everybody.

So the next time an Opportunity Party troll turns up on a social media post insisting that you can’t discuss the land tax without also taking the UBI into account, agree with them.

Then send them this article.

And perhaps suggest that before correcting everyone else about the brilliance of the economics, they might want to go back to school and learn some basic arithmetic….

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