Tax changes could lessen gender pay gap
New Zealand women are being held back by a tax system that claws back too much Government support too quickly when they start earning more money, one economist says.
March 8 is International Women’s Day. Kiwibank economist Mary Vergara put out research to mark it which noted that while many things had improved, there was still a gender pay gap, women were still not making it to the top of the business world in numbers equal to men and were picking up the majority of childcare.
She said while the gender pay gap had narrowed, women earned a median 12.7 per cent less than men.
Part of the reason for that could be the way that Working for Families and other Government support was applied to a household’s earnings.
At the moment, Working for Families credits are removed once a household earns more than $42,700.
Vergara said that created a situation where women – who were often a household’s secondary earner – were disincentivised to seek more or better paying work because the marginal tax rate on the extra money they would be earning was so high.
Tax commentator Terry Baucher has previously said someone who was a sole earner being paid $42,700 would pay an effective marginal tax rate of 42.5 per cent on each extra dollar earned – broken down, this is the combination of their 17.5 per cent tax rate, and the loss of 25 per cent of their Working for Families credits.
If they had a pay increase that pushed them into the 30 per cent tax bracket, the extra money earned (and the loss of Working for Families) would create an effective tax rate of 55 per cent. With ACC payments, KiwiSaver contributions and student loan repayments, they could end up losing more than 70 per cent of any new earning.
Infometrics chief forecaster Gareth Kiernan said a second earner in a household could feasibly expect to pay 17.5 per cent tax, 1.4 per cent ACC, 12 per cent for a student loan and a 25 per cent Working for Families abatement, adding up to a 55.9 per cent effective marginal tax rate.
‘‘Although this seems like it would still be worthwhile working, we haven’t taken account of other costs associated with working such as travel and childcare. A person earning $25 an hour and working part-time for two eight-hour days per week would earn $400 gross, $240.89 after deductions. If we assume $65 a day for childcare for a child under three and $10 a day for travel, they would get to keep $90.89.
‘‘If the same person was offered another day’s work they would earn $600 gross, $329.11 after deductions. Making the same childcare and travel cost assumptions, they would get to keep $104.11 or, in other words, $13.22 for working an extra day.’’
Vergara said the 2017 increase in the Working for Families abatement rate was the opposite of what should have happened. ‘‘To provide incentive for the secondary earner – women – to add more money to the jar, the abatement rate could be lowered. However, women’s experience with the tax system, as the secondary earners, may justify a complete overhaul.’’
‘‘To provide incentive for women to add more money to the jar, the abatement rate could be lowered.’’ Economist Mary Vergara