“A new empirical study of the effects of income redistribution underlines its limitations compared to wealth creation as a means of alleviating poverty”, Roger Kerr, executive director of the New Zealand Business Roundtable, said today.

Released this week, The Outcomes of Income Transfers, written by economist Mark Harrison and published by the New Zealand Business Roundtable, is a detailed analysis of the benefits and costs of redistribution.

”Dr Harrison notes that proponents of redistribution generally see it as an ideological issue: they believe redistributing money to the poor is the easy solution to poverty and inequality, and all that is required is the political will to do it. But, he points out, they seldom question how effective it is.

“Furthermore, he argues that this is an empirical question, not an ideological one, and his study concludes that income redistribution is a relatively weak strategy for raising incomes, is costly, and has many disincentive effects.

“The study points out, for example, that transferring just 1% of income to the bottom 20% of households from the other 80% of households would involve a $900 million transfer, would require an increase in the average tax rate of 6.5 percentage points, and would only increase incomes in the bottom 20% by $3000 a year – and that doesn't take account of the impact of raising taxes on the productive capacity of the economy”, Mr Kerr said.

“Alternatively, if the goal were to raise all incomes to the commonly suggested poverty line of 60% of median income, this would require everyone's effective marginal tax rate to rise by 47 percentage points. The bottom rate would rise from 19.5% to 65.5%, while the top rate would go up from 39% to 86%.

“Again this example assumes raising the necessary tax is costless, and this is far from the case. High tax rates reduce work incentives and decrease national income. There are also heavy administration and compliance costs involved in raising tax revenue and redistributing it.

“In this regard, the study cites the enormous efficiency costs of the Working for Families package, which largely redistributes income from single people and couples without dependent children to families with dependent children, many of them on relatively high incomes.”

The study finds that redistribution programmes are of little benefit to the recipients over a lifetime. Furthermore, they do not address the underlying causes of poverty and indeed may exacerbate them: by discouraging recipients from working and gaining experience, such programmes may create dependency and a so-called underclass.

“Dr Harrison's study concludes that the most effective way to address poverty is to adopt policies that raise economic performance and increase living standards, such as pursuing sound macroeconomic policies, reducing economic distortions, establishing flexible labour markets that provide jobs for people willing to work, and providing opportunities to the poor through good education and training policies.

“New Zealand policy makers genuinely interested in eliminating poverty and hardship in this country would do well to read Dr Harrison's study before embarking on further income transfer programmes”, said Mr Kerr.

For more information, contact:

Mark Harrison
Principal
Consultecon
Ph: +61 2 6251 3477
Email: markharrison@ozemail.com.au

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

Web: www.nzbr.org.nz