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Contact:
Foundation for Economic Growth,
P.O. Box 10-282,
Wellington, N.Z.
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Incentives; How to work less and be paid more.
By Phil Scott
Oct 19, 2004, 12:44

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I sometimes think that our employees in parliament have never heard of this word - incentive. I guess that they would want to be in parliament for a variety of reasons and the handsome salary and extensive perks is only a side issue. But, for the average Kiwi battler who is trying to support a wife and two kids the money is important.

There is an incentive to work. Normally people would think that by working hard and getting up the salary scale or putting in more hours that they would be rewarded by getting more money. After all, the government supplied “free” education now costs money and if anyone in the family should need an operation then the “free” hospital will put them on a waiting list to get on the waiting list. (No wonder it’s free!) If it happens to be Dad who needs a hernia stitched up then he will find himself working in pain for years like my motor mechanic. So we need money for health insurance as well as everything else.

This is what incentive means.

The funny thing is that our Labour/Progressive government gives out incentives which mean that people can be better off by not working more but by working smart with their boss! Let me explain.

New Zealand is the home of small business, almost 300,000 of them and they account for the bulk of workers in the country. Workers outside of this are the few in large business, mostly multi-nationals, and bureaucrats. It is these small businesses that generate the money and wealth in New Zealand so we should all look after them. If they all stopped suddenly the government would not have any money to pay state servant salaries – so we must take good care of our small businesses.

Michael Cullen has a strange way of doing it. Look at his new tax regime that is due for launch next year. Suppose that I own a small business employing 5 staff making farm gates and like all small businesses I struggle from week to week to ensure that I have enough money coming in to meet the wage bill and PAYE and GST and ACC and all the other costs of running a small enterprise. My workers are skilled and we provide a range of gates from sound up to superior so my staff expect to get paid up to $60,000 per year for their efforts. That is, if they work 50 weeks a year and produce 10 gates per day earning $24.00 per gate they get paid $240 per day or $1200 per week. Unfortunately the government takes taxes off this and my typical employee with a partner and two kids only ends up with $45,236 in his pocket. If I pay him only $15.20 per gate he will earn $38,000 per year and still pay tax but get back much more from the tax man and end up with $42,860. Only $2376 worse off. If I paid him a daily clothing allowance of $10 he would get $2500 cash in the hand and he would be ahead of the guy being paid $60,000 per year. I am saving $8.80 per gate which gives me a grand total of an extra $110,000 per year.

I could certainly afford to give my employees 4 weeks holiday per year and send them off to Australia or other foreign parts to study gates one week a year all expenses paid. That would make my workers richer and happier and would make me richer and happier. Thank you very much Dr. Cullen!

Consider another business employing 5 people on a salary of $60,000. I could immediately reduce their salary to $38,000 and send them overseas on to a conference at a cost of say $10,000. Their after tax income would be down by $2376 but they would be going on an overseas “conference” with $10,000 to cover costs. The costs would include accommodation at a top hotel but I am sure that they would soon discover a cheaper place to stay and the daily allowance of say, $500 would soon add up to give them a cash surplus of more than $2376. In other words they would have an annual trip overseas with their family and more money in the pocket. I would be saving $12,000 per person or a total of $60,000 per year. Well worth my while to consider. What you might call a sizeable incentive.

Now we can look at this another way. An annual salary of $60,000 is $1154 per week over 52 weeks and a salary of $38,000 is $731 per week over 52 weeks.

Suppose that I decide to give my workers a 4 day job for $38,000 per year instead of a 5 day job for $60,000. The weekly rate is $731. They are only doing 80% of the work but are getting almost the same amount of money. The $2376 they lose by dropping from $60,000 to $38,000 amounts to $45.69 per week. They can have one day off a week and only lose $45.69 out of the pay packet. I still need to get the same amount of work done so I have to employ another salaried person on $38,000. My payroll has gone from 5 times $60,000 or $300,000 to 6 times $38,000 or $228,000; A saving to me of $72,000. If I could find a way of paying six people an extra $50 per week all 6 of them would be better off working 4 days a week than working 5 days a week. The extra $50 each per week would cost me $15,600 per year reducing my savings to $56,400.

Well that looks like a good deal all round. The workers get the same amount of money for working a four day week and I get an extra $56,400 per year for my brilliant idea. Thanks very much Dr. Cullen! Your incentives are working.

Now if I can just make an estimate of 300,000 small business saving themselves $56,400 each year from the tax bill that makes around $16,920,000,000. Only $16 billion Dr Cullen, that shouldn’t be to hard to find.

Perhaps Dr Cullen will need to think up some more legislation to stop people following the incentives. How complicated will our tax system be then?


© Copyright; Foundation for Economic Growth and various authors. Individual authors retain their own copyright.

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