Sample 3.4 - Student exemplar for PEER assessment practice
Market failure occurs when a (free) market fails to deliver an efficient or equitable outcome
Income distribution in New Zealand can be assumed to be inequitable because for many decades
successive governments (both National and Labour) have intervened in an attempt to redistribute
income from high income earners to low income earners.
Graph 1 – NZ Income Distribution
(with government intervention)
In the remainder of this essay I will analyse the impact of 2 policies on NZ’s Income distribution and
decide which one is the most efficient and / or equitable.
Policy 1 – Lower income tax rates for high income earners
Theoretically, by decreasing income tax, there will be an
increase in incentive to work harder, as people can expect
more disposable income.
The government assumes that there will be economic
growth in New Zealand as the spending of higher income
earners creates larger circulation of money (ie. Increased
consumption results in a multiplied increase in gross
domestic product). They also assume that increased
spending by high income earners will trickle down to low
income earners as more people will be employed due to
the economic growth.
Lower tax for
high earners
income
Although income distribution may worsen the increased
income more people would be earner higher would mean
NZ’ers standard of living as a whole should improve.
Policy 2 – Working for Families (Targeted Tax Credits)
“Low” income families receive tax credits from the government. This policy is designed to make
easier for NZ’ers to work and raise a family. Families with children are over-represented in NZ’s poor so
giving them additional after tax income will result in a more equal distribution of income. It could also
improve efficiency in the long run, as the increased family income should lead to healthier children (eg.
Working for
families
earners
income
because higher income could lead to healthier eating or more
visits to the doctor). If children are less sick they will perform
better at school resulting in a more skilled and productive
workforce in the future.
With higher family incomes more children can afford tertiary
study, also making the workforce more productive in the long
run.
Conclusion – Which policy is the most efficient and / or equitable?
Proponents of lowering income tax for high income earners recognise that it will not improve equality
but they argue since everybody will be better off (through the trickle down of increased spending by the
“rich”). This policy was part of Rogernomics introduced in NZ in the 1980’s and the trickle down has not
occurred.
The latest Ministry of Economic Development Report (2011) included the following figure showing
NZ’s nominal GDP has fallen (particularly when compared to Australia and the UK)
In addition, the
impact of Rogernomics
and more free market
approaches since the
1980s have significantly
widened NZ’s income
distribution (ie gap
between high and low
incomes is wider).
Critiques of working for
families (and social welfare
in general) argue that
people who receive money
from the govt will become
less self sufficient. Due to
laziness, since they receive
income even without
working (lost incentive to
work). However, the report
shows that since working
for families was introduced
(in early 2000) hours
worked per capita have
remained relatively high
So overall I would choose working for families it has the longer term hope of improving productivity and
in the short term seem to have slowed the worsening income distribution that the gini coefficient graph
(Fig 1.7) shows occurred in NZ after tax rates for high income earners were reduced. It has the potential
to both improve equity and efficiency but the lower income tax for the high income earners could only
increase efficiency (and it doesn’t appear to have done this).