Vital to ease child poverty; tax credit seems best way

Emily Keddell considers the options for alleviating child poverty.

Any mechanism that supplies more money to low-income families with children will, surprise surprise, be borne out by research as a way to "reduce child poverty"

AS poverty in households with children rises in nearly all OECD countries, many solutions are being bandied around.

A statement by OECD Secretary-general Angel Gurrda, "Family benefits need to be well-designed to maintain work incentives, but they need to be effective in protecting the most vulnerable, otherwise we risk creating high, long-term social costs for future generations", encapsulates the main conundrum. However, how exactly that can be achieved remains elusive.

You could be forgiven for getting confused. Government minister Gerry Brownlee says that "international evidence shows the single biggest factor in reducing poverty is paid work".

Various promoters of the universal child benefit say "international evidence shows that a universal child benefit reduces child poverty". Others promote the universalisation of the in-work tax credit as an "evidence-based" solution.

In fact, all of these are like saying, "Research shows watering plants makes them grow", then arguing whether watering is best done by a watering can or an irrigation system, by a dedicated gardener or left to nature to provide. All of which misses the point that it's water itself that makes plants grow, regardless of method of supply.

Likewise, whether it's paid employment, a universal child benefit, or universalisation of the in-work tax credit, any mechanism that supplies more money to low-income families with children will, surprise surprise, be borne out by research as a way to "reduce child poverty".

Which is best, however, requires a more careful and complex evaluation of the combination of contextual factors that make it work. A brief examination of the paid-work mantra, for example, shows us countries in which it "works" are those where wages are high, there are significant tax incentives and there is job access support and high-quality free child care that enables paid work for single parents. This combination provides a significant lever out of poverty and allows parents to meet both work and care commitments. In this country, however, paid work achieves a somewhat less portentous outcome, due to lower wages, fewer jobs and not as much quality, affordable child care.

While increasing tax incentives for those in paid work has offset the worst poverty for some caused by low wages (with the working-for-families package cutting in half the rates of child poverty in families with one adult working for money), this package holds little relief for those who have no adult working for money, and not enough relief for those stuck in low-wage jobs in high-cost cities.

It is the former of these two groups - sole parent beneficiaries - that remains most vulnerable to extreme poverty, and whose children figure most prominently in the child poverty figures. Members of this group are largely recipients of the domestic purposes benefit, of whom 90+% are women. It is these women and their children who are not covered by the middling benefits associated with paid employment, not only due to the more obvious wage benefits of paid income, but because they do not qualify for a significant component of the working-for-families package: the in-work tax credit.

Thus, in terms of Mr Brownlee's statement, to say that paid employment itself is the answer to poverty is somewhat overstated. In fact, the differential treatment of those in and out of paid work by the tax system is a significant contributor to income levels, rather than paid work in and of itself. The more obvious point is that members of this group are less available for paid employment because they are already performing valuable work: raising children.

OECD research shows us that whatever the mechanism for providing tax/benefit trade-offs, that where sole parents, whether in work or out, are treated the same way as "any other parent" provides the best type of recipe for poverty alleviation and engagement in the paid workforce.

Two ideas floating around to reduce child poverty (in addition to paid work) are the universalisation of the in-work tax credit (that is, paying it to everyone) and the universal child benefit. Both meet the "any other parent" criterion, as either would homogenise sole beneficiary parents with all other parents by treating them identically within the tax/benefit system; and both would increase the income of the poor.

If the universal child benefit and the in-work tax credit meet the "any other parent" criterion and increase real income, which is best for us?

The major difference between the two is that the in-work tax credit is targeted to low and middle-income earners as per the current targeted working-for-families package, whereas the universal child benefit would be paid to everyone regardless of income level.

On this point, depending on your philosophy, the in-work tax credit finds greater purchase. As an essentially redistributive mechanism, the tax credit remains targeted to those who need it most, but removes the current differentiation between those who work for money and those who work looking after their children. What's more, as a targeted payment, the tax credit is more able to reduce inequality as well as poverty.

In contrast, the universal child benefit would be paid to everyone, thus lifting all incomes equally; reducing poverty but not inequality. Finally, when high-income earners receive a universal entitlement such as the universal child benefit, they don't churn it directly back into the economy as low and middle-income earners do - the latter spending it within shorter time frames on everyday items rather than adding it to the trust fund.

The in-work tax credit is therefore targeted to reach the very poorest among us, removes a current area of discrimination, is redistributive, is simple to administer as it's part of the current system, will help stimulate the economy, and treats beneficiaries as "any other parent". It's got my vote.

In times of few job prospects for many, we can ill afford to withhold provision from the very poorest as some kind of cruel punishment for not having paid employment, or as an implicit sanction for having children at all.

It's clear we must act to protect beneficiaries and their children from the scourge of poverty now.

While supporting access to paid work for those who can is an important part of the equation, we need better tax benefits for all parents in need, regardless of employment status. I favour the in-work tax credit, but let one or the other be chosen. Neither would be a tragedy.

Emily Keddell is a lecturer in the department of sociology, gender and social work at the University of Otago.

 

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