The government's policy decision to exclude beneficiaries from the financial benefits of the tax cuts is based on an economic theory that a wide gap between income received on a benefit and income received in paid employment is necessary to give proper incentives for beneficiaries to seek and accept low paid employment. The Tax cuts programme increases this income gap by between $9 and $42 a week.

Dr Paul Dalziel, in his report Poor Policy, doesn't doubt that this work incentive effect exists, but says that the economics literature that has attempted to measure the size of the effect concludes that the effect is very small. His report cites two authoritative surveys of the economic literature one by NZ authors, and one by an American author, which report only a small effect on getting beneficiaries into jobs.

Dalziel: "In contrast, the poverty effect of such a policy can be very large. This is precisely the issue that the Council of Christian Social Services attempted to raise in 1991 after the benefit cuts, but which is nowhere addressed in the [tax cuts documents]. It must be seriously doubted whether the small labour supply incentive effects achieved by this programme are worth the large increase in poverty brought about by reducing benefit levels in 1991, and reducing tax rates in 1996..."