|Sunday, December 12, 1999||(Comment)|
The Single Means Test
Submitted to the Reference Group on Welfare Reform (Chair: Patrick McClure), December 12, 1999. Abridged (not updated) August 10, 2006. Reposted August 18, 2012.
Social security payments should be subject to a Single Means Test (SMT), which should apply to the aggregate of benefits otherwise payable to each family. Specifically, the aggregate of benefits should be abated by an amount equal to 100 percent of the unimproved rental value of all land owned by the family, net of municipal rates and State land taxes paid on unimproved land values.
The SMT would eliminate, at a stroke, all destructive interaction between the welfare system and the income tax system. The SMT would not discourage efforts to obtain paid work or improve earning capacity, because it would not produce effective marginal tax rates (EMTRs) higher than the marginal income tax rates. Neither would it discourage saving in the form of superannuation, shares, bonds or interest-bearing deposits, because such assets would not affect entitlements. Because the SMT would apply to unimproved land values but not to buildings or other improvements, it would discourage speculative hoarding of land and encourage development, thus creating jobs.
Most of the existing social security system should be replaced by a single core benefit, called the General Rebate or GR, which should be subject only to a very wide activity test. For people in particular circumstances, the GR should be supplemented by child allowances, study/training allowances, sickness/maternity benefits, carers' benefits, age and disability benefits, and a job search allowance — each of which is almost self-explanatory in terms of qualifying criteria and activity tests.
The GR could replace the personal income tax threshold, allowing all market income to be taxed at a flat rate without any disadvantage to low income earners. Elimination of the threshold would not only minimize the required rate of taxation, but also make the tax liability of each family independent of the division of taxable income, thereby defeating most tax-minimization schemes and reconciling the individual basis of tax liability with the family basis of welfare eligibility.
As an extension of Mutual Obligation from jobseekers to employers, all Commonwealth industry assistance should be given in the form of wage subsidies and thus made contingent on employment outcomes.
1. The Big Lie: That means-testing reduces the tax burden
2. The real level of income taxation
3. The real level of property taxation
4. The consequences
5. The best tax to hide
6. The answer to NIMBY campaigns
8. Raising the speed limit
9. Rationalizing benefits
10. Thresholds mean rorts!
11. Anticipated objections
12. Addressing the guiding principles and Terms of Reference
The treatment of welfare in the Federal budget is creative accounting on a gargantuan scale. Economists refer to pensions and other benefits as transfers because such payments, together with the taxes that fund them, simply “transfer” spending power from one part of the private sector to another. Hence the welfare budget, contrary to populist rhetoric, is not part of the net burden of taxation on the private sector. If all transfers were reclassified as tax rebates (allowing taxes to be negative if necessary), welfare would disappear from the Federal budget, causing a massive cut in official tax receipts offset by an equal massive cut in official expenditure — although in reality nothing would change. Similarly, if all abatements (reductions of benefits) due to means tests were reclassified as taxation, and if all benefits that would be payable in the absence of means tests were classified as expenditure, there would be a massive increase in official tax receipts offset by an equal massive increase in official expenditure — although again, in reality, nothing would change. Between these two extremes, the welfare budget is whatever the bean-counters want it to be. In the genteel language of public finance, the tax/transfer system is said to “lack transparency”. In the vernacular, it's a con job.
A person contemplating whether to earn additional income is interested in the number of cents that the Government will “claw back” from each additional dollar earned. Whether the clawback is called a tax and taken by the ATO, or called an abatement and taken by Centrelink, or some combination thereof, is irrelevant. Similarly, a person contemplating the acquisition of an asset will be interested in the the number of cents that the Government will claw back from each dollar of realized or imputed income from the asset. Again, the division of the clawback between the ATO and Centrelink is irrelevant. In general, in the balance of marginal gains and losses on which people base their economic decisions, what matters is the combined effect of abatements and taxes. Therefore, while abatements can theoretically be classified either as reductions of expenditure or as taxes, abatements must be lumped together with taxes in the analysis and design of economic policy.
For both the Government and the recipient, every means-tested benefit is equivalent to a non-means-tested benefit of the same size, combined with a tax at the same rate and on the same base as the means test. An income-tested benefit abated at a certain marginal rate within a certain range of income (called the taper range) is equivalent to a non-income-tested benefit combined with an income tax surcharge at the same marginal rate on the same range of income, payable by recipients of the benefit. An assets-tested benefit abated at a certain marginal rate within a certain range of asset values is equivalent to a non-assets-tested benefit combined with a wealth tax at the same marginal rate on the same range of asset values, payable by recipients of the benefit. Moreover, the range of available benefits is now so wide that virtually every citizen would be entitled to some benefit if there were no means tests. It is as if every citizen were receiving at least one benefit and paying the taxes corresponding to the associated means tests.
Thus it may be seen that means tests simply hide taxes: an income test is a hidden income tax, and an assets test is a hidden wealth tax.
While many politicians and academics have pointed out that EMTRs on low income earners greatly exceed the top marginal income tax rate, I do not know of a single one who has admitted the complete equivalence of income testing and income taxation, and I have seen many argue that the abolition of means tests is prohibitively expensive. Perhaps the intellectual elite, and especially the few politicians among them, are holding their peace for fear of obfuscation by opportunistic opponents.
The income test on Newstart has a maximum taper rate of 70 cents in the dollar. This combines with the first income tax rate of 20 cents in the dollar to produce a short-term effective marginal tax rate (EMTR) of 90 cents in the dollar. If a person is receiving a combination of benefits with separate income tests, the EMTR can climb over 100 percent, indicating that an increase in earned income causes a decrease in take-home pay.
The income test applicable to family allowance has a taper rate of 50 cents in the dollar, and usually applies over an income range in which the nominal marginal income tax rate is 35.5 percent (including Medicare), producing an EMTR of 85.5 percent. At lower incomes, calculation of the EMTR becomes more complex, and the result occasionally rises above 100 percent.
The above EMTRs do not allow for any work-related expenses. The largest such expense for most people, namely transport to and from work, is not even tax-deductible. Thus the real situation is worse than the above figures suggest.
In July 1997, the Institute of Chartered Accountants published a calculation of the effective tax burden on a single-income family in a rented home, with a son at secondary school and a daughter at primary school, for the 1996/97 financial year [Courier-Mail, Brisbane, July 28, 1997, p.1]. If such a family increased its earned income from $20,000 to $30,000 (per annum), its disposable income after tax and benefits decreased by $1730; that is, the extra $10,000 was taxed at an effective rate of 117.3 percent.
The effective tax rates on working housewives have been studied by the National Centre for Social and Economic Modelling [Weekend Australian, October 4-5, 1997, p.21]. One example concerns a mother with two small children and a husband earning $397 per week. If the mother starts working 25 hours/week at $8.60 per hour, the family's disposable income increases by $11.60 per week; the effective tax rate on the mother's earnings is 94.6 percent, and the mother effectively works for 46 cents per hour. A second example concerns a mother of three with a husband earning $540 per week. If the mother is capable of earning $8.60 per hour, the family's disposable income is higher if the mother stays at home than if she works between 1 and 19 hours/week. Thus the mother faces an EMTR above 100 percent. She does not get paid to work; she pays to work.
The taxes disguised as income tests are grossly inequitable because they apply at the lowest marginal rate (zero) to persons whose incomes are above the taper ranges, and impose the highest EMTRs on persons with lower incomes (average incomes in the case of family allowance, and very low incomes in the case of Newstart).
If your EMTR approaches or exceeds 100 percent, you are caught in a poverty trap: if you cannot make ends meet, it is no use working more hours and earning more income, because the Government will confiscate every extra dollar that you earn — unless, of course, you fail to declare your earnings... . The manifest inequity of imposing the highest EMTRs on the poor, while the rich engage in elaborate tax-minimization schemes, invites contempt of the law and makes welfare fraud the easiest of all crimes to rationalize. Besides, the behaviour of debt collectors is such that a person in financial crisis might well prefer to fall into the hands of the police.
The New Tax System promises to reduce marginal tax rates and the taper rate for family allowance; but it will not eliminate EMTRs in excess of 100 percent, and it will not change the nature of the problem: the tax rate and the taper rate will still add up, producing an EMTR that would be politically suicidal if the Government were honest enough to call it a tax.
The assets test on the age pension reduces the pension by $3 per fortnight for every $1000 by which the recipient's assets exceed the threshold. This is equivalent to a wealth tax of 7.8 percent per annum on assets in the taper range. This tax rate is higher than present market interest rates; in other words, each additional $1000 in assets costs more in pension entitlements than it earns (or saves) in interest and rent. If asset values are annualized at current interest rates, the assets test is equivalent to a marginal income tax rate in excess of 100 percent.
The total revenue raised by the assets test (hidden wealth tax) could be raised more simply — and without harassing people in their old age — by imposing a tax on inheritances. If wealth taxes and death duties are regarded as political non-starters, the same judgment should apply a fortiori to the assets test!
If the designers of Newstart had set out to entrench high levels of unemployment, they could hardly have done a better job. If there were no income test on Newstart, the wages paid by employers would only need to supplement Newstart, not replace it. But there is an income test, and its taper range lies entirely below the minimum full-time adult wage and mostly below the minimum half-time adult wage. Hence a person who moves from unemployment to entry-level employment crosses most or all of the taper range, so that the wages paid by the employer are offset by the loss of most or all of Newstart. This fact is implicitly taken into account when minimum award wages are set.
Thus the Newstart income test, which is supposed to save taxpayers' money, helps to price workers out of a job, forcing the taxpayers to provide more Newstart!
If the income test were abolished, the tax presently disguised as the income test would need to be partly replaced by other taxes; I say partly because the resulting increase in employment would expand the tax base, producing more revenue even without new taxes or higher rates.
The assets test on pensions and related benefits, by penalizing the accumulation of assets beyond a certain point, discourages domestic saving and investment. Its preferential treatment of home owners encourages overinvestment in real estate and underinvestment in job-creating capital. The income test on the age pension, by reducing the effective long-term returns on superannuation, shares, bonds and interest-bearing deposits, discourages such forms of saving. The result is a low level of saving, hence a shortage of funds for investment in job-creating enterprises.
It is said that Australia is close to international best practice in terms of targeting welfare payments to those most in need. Under the present system of means-testing, this is a polite way of saying that Australia is close to international worst practice in terms of the disincentives, distortions and deadweight caused by the welfare system. Fortunately, however, there is a way to target benefits without undesirable side effects.
Ground-rents are a still more proper subject of taxation than the rent of houses. A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground. ...
Both ground-rents [the rent of land under buildings] and the ordinary rent of land [the rent of agricultural land] are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Though a part of this revenue should be taken from him in order to defray the expenses of the state, no discouragement will thereby be given to any sort of industry. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents and the ordinary rent of land are, therefore, perhaps the species of revenue which can best bear to have a peculiar tax imposed upon them.
Ground-rents seem, in this respect, a more proper subject of peculiar taxation than even the ordinary rent of land. The ordinary rent of land is, in many cases, owing partly at least to the attention and good management of the landlord. A very heavy tax might discourage too much this attention and good management. Ground-rents, so far as they exceed the ordinary rent of land, are altogether owing to the good government of the sovereign, which, by protecting the industry either of the whole people or of the inhabitants of some particular place, enables them to pay so much more than its real value for the ground which they build their houses upon, or to make to its owner so much more than compensation for the loss which he might sustain by this use of it. Nothing can be more reasonable than that a fund which owes its existence to the good government of the state should be taxed peculiarly, or should contribute something more than the greater part of other funds, towards the support of that government.
— Adam Smith (1723-1790),
The Wealth of Nations, V.ii.74–76.
Ipse dixit. In one of those precious exchanges of candour into which serving politicians occasionally lapse, the truth of Smith's doctrine was acknowledged by one leading representative of each side of Australian politics. On 3 December 1991, the Australian Financial Review carried an article by Senator Peter Walsh (Labor), attempting to show that the proposed GST was worse than the existing payroll taxes. Arguing against the simplistic view of payroll tax as a tax on jobs, Walsh wrote:
With the exception of tax on economic rent and inherited wealth, all taxes inhibit employment and economic growth.
An economic rent is an economic reward that cannot be justified as an incentive to perform the function thus rewarded. Because such a reward does not encourage wealth creation or service delivery, it can be taxed at any rate — up to 100 percent — without reducing the level of wealth creation or service delivery.
Seven days after Walsh's article, the Financial Review published a letter in reply by the Hon. John Winston Howard. After rejecting Walsh's position on the ground that payroll tax falls preferentially on the labour factor of production, Howard conceded:
I do not deny that all taxes, with the exception of those on economic rent and inherited wealth, have some employment and economic growth effects.
But there the subject rested, and there it continues to rest under Howard's Prime Ministership — except that he now wants to retain payroll tax in addition to the GST.
As Adam Smith implies, the archetypal economic rent is the unimproved rental value of land. This value accumulates in the hands of the landowner, but it is not created by the act of acquiring or owning the land; rather, it is created by the community, by its demand for the land and by the services and other advantages (e.g. access to markets) that it supplies to the land. The unimproved rental value of land is not an incentive for providing land, because the land in its unimproved state is provided by nature and would still exist if its past and present owners had never been born. It is not an incentive for improving the land (e.g. erecting buildings), because it excludes the value of such improvements. It is not an incentive for increasing the unimproved value of the land, because the increase does not accrue to the people who create it by means of their labour, investment and taxes.
But because the unimproved value of land tends to increase, it is an incentive to acquire land and hoard it while waiting for the price to go up; indeed, large-scale hoarding actually drives up the price. This unearned increment is an incentive not to render service or to create wealth, but merely to appropriate wealth created by others. Such appropriation is a zero-sum game when viewed in isolation, and a negative-sum game when compared with more productive uses of land.
The specific idea of taxing the economic rent of land also has a measure of bipartisan support. The Hon. Clyde Cameron AO, the former Minister for Labour in the Whitlam government, is a lifelong supporter of land value taxation. Sir Allen Fairhall, a former Minister in the Menzies government (variously for Interior and Works, Defence and Supply), advocates land value taxation in his recent book Towards a New Society.
The implications of the above discussion for tax reform may be simply stated:
To maximize employment and minimize welfare dependency, one should maximize taxes on economic rent and minimize taxes on labour and capital.
Because all means tests are hidden taxes, this tax-reform strategy translates into a welfare reform strategy:
To maximize employment and minimize welfare dependency, one should make maximum use of means tests based on economic rent and minimum use of means tests based on wages and profits.
If means tests based on economic rent are thought not to give a sufficient degree of abatement, there is no case for introducing a supplementary income test, because such a test is a hidden income tax. Nothing can be achieved by income testing that cannot be achieved more simply, efficiently and transparently by adjusting income tax scales. Moreover, if income tests are accepted in principle, political pressures demand that the tests be applied at ever lower incomes and at ever steeper abatement rates, until the highest EMTRs are borne by the working poor; but if income tests are rejected in favour of adjustments to income tax scales, the same political pressures prevent the appearance of anomalous EMTRs. To avoid poverty traps, there must be only one system for penalizing earned income. Let it be the tax system.
Because the unimproved rental value of land is of all economic rents the easiest to evaluate and the hardest to conceal, the required reform of means-testing may be translated into practical terms as follows:
The aggregate of benefits otherwise payable to each family should be abated by an amount equal to 100 percent of the unimproved rental value of all land owned by the family, net of municipal rates and State land taxes paid on unimproved land values.
I call this proposal the Single Means Test or SMT.
When land value taxation is implemented in the form of a means test, the abatement of benefits to each family cannot exceed the sum of benefits otherwise payable. This is a disadvantage from a fiscal or economic viewpoint, because economic rent in excess of benefits escapes taxation; but it is an advantage from a political viewpoint, because nobody gets a bill demanding payment of the tax.
If a government compulsorily resumes the land under your house, you get compensation. But if the same government makes a decision that reduces the value of the land under your house, e.g. by allowing a source of noise or pollution to be established nearby, you get nothing. Hence, when any such decision is mooted, it provokes well-funded and well-organized political campaigns by NIMBYists (Not-In-My-Back-Yard-ists). The huge sums that are won and lost as a result of land use decisions are a recipe for corruption — at least of the system of government, if not of the individuals within it.
Governments claim that they cannot afford to compensate landowners for government-induced “wipeouts” in property values. One reason is that landowners whose properties increase in value as a result of government decisions are allowed to keep their unearned windfalls. If the windfalls could somehow be taxed away, they would provide revenue that could be spent on compensation for wipeouts; indeed they would provide more than enough revenue, because the overall trend in land values is upward. If such a system of taxation and compensation could be devised, nobody would stand to gain or lose relative to others in consequence of land use decisions, so that there would be no NIMBYists and no scope for corruption.
As the supply of land is fixed, rents and prices of land are determined by permitted land uses and by demand. Inasmuch as all taxes affect the capacity of the economy to pay for land and hence the effective demand for land, all taxes are at least partially shifted onto land values. This observation applies to the taxes presently disguised as means tests on welfare payments; if these tests were abolished, the resulting rise in land values would counteract the fall caused by the Single Means Test. However, the SMT would stabilize land prices by partly compensating for variations in rental values howsoever caused. Changes in sale prices of land would fully reflect changes in rental values caused by land use decisions, and partially reflect compensating changes in abatements. As a result, families owning land values in the taper range would be fully compensated for windfalls and wipeouts in rental values, and partly compensated for the corresponding changes in sale prices, while families with more valuable holdings would only receive the latter compensation. Thus the SMT would not be a complete solution to the NIMBY problem, but it would treat the poorer NIMBYists more generously than the richer ones, and would be better than nothing.
The calculation of unimproved land values is a well-developed science. For more than a century, local governments in Australia, and especially in Queensland and NSW, have been charging rates on unimproved land values. These values tend to be expressed in capitalized form, but are easily converted to annuities. Therefore what I am proposing is not unduly difficult. Also note that the administration of the Single Means Test would not need to be very accurate in order to constitute an improvement on the existing array of means tests, which have a well-deserved reputation for inequity, arbitrariness and complexity.
Unemployment rises suddenly and falls slowly. It rises during recessions, which follow speculative bubbles in land prices, which follow periods of more gradual growth in land values caused by economic growth. The link between the speculative bubble and the ensuing recession is causal, although the precise mechanism varies with monetary policy. If the policy is to do nothing, business is rendered unprofitable by the excessive cost of access to land. But a land price bubble is also inflationary, and creates an illusion of wealth leading to excessive consumption and inadequate saving; either event may provoke high official interest rates, which will strangle businesses financed by debt. As businesses fail, employment falls and job security declines, causing reduced spending, hence more difficult business conditions: a runaway process.
The Single Means Test based on rental values of land would tend to stabilize land prices and reduce the profitability of land speculation, allowing greater economic growth, hence higher levels of employment, without speculative bubbles in land prices and the evils that follow therefrom.
Given that the aggregate of benefits payable to each family should be subject to a Single Means Test, it remains to determine the components of that aggregate and the eligibility criteria for each component.
The variety of benefits is now so large that almost every citizen would qualify for a benefit in the absence of means tests. I therefore suggest that the greater part of the present welfare system could be replaced by a single core benefit with a very broad activity test. In recognition of the equivalence between tax rebates and expenditure items, I suggest that the core benefit be called the General Rebate or GR.
Because the GR is to be the core benefit, jobseekers should obviously be eligible, as should other adults who cannot reasonably be expected to work or seek employment. In the latter category are the sick, the severely disabled, the aged, perinatal women and full-time carers. Full-time workers must be eligible, to avoid work disincentives and upward pressure on wages. The self-employed must be eligible, to avoid disincentives to creating one's own job. Full-time students and trainees in approved courses must be eligible, to avoid disincentives to study and self-improvement. Stay-home parents of young children must be eligible; otherwise some of them will be forced into employment against their will, causing simultaneous increases in the numbers of two-income families and zero-income families. Similarly, persons who divide their time between eligible activities must be eligible.
Benefits similar to the GR are variously described in the literature as a citizen's dividend (CD), or a guaranteed minimum income (GMI), or a basic income (BI). However, the GR is not an example of a “universal basic income” (UBI), because it is not universal; it is subject to an activity test, albeit a very broad one.
To ensure that the safety net is not a hammock, the General Rebate should not be too generous: it should be paid at such a rate that no economically rational person would want to live on the GR alone. Therefore, for those who are unable to help themselves and/or have peculiar unavoidable expenses, the GR must be supplemented by other benefits. There must be sickness and maternity benefits, carers' benefits, and age and disability benefits. There must be child allowances because supporting and guiding children involves costs — and is of paramount importance to the future of those children and the nation. There must be study and training allowances to meet the expenses of study and training and compensate for their short-term effect on earning capacity. To meet the costs of looking for work, such as travel, photocopying and postage, there must be a job search allowance. But of course there should not be a benefit for unemployment per se. Hence an unemployed person who moved into full-time work would only lose the job search allowance; he/she would keep the GR, subject as always to the Single Means Test.
What about rent assistance? I envisage that rent assistance would be rolled into the GR, and that the GR would be paid at a higher rate to a lone adult than to an adult living with another adult. This would make due allowance for the multiple accommodation expenses of separated families. I am suspicious of rent allowances that depend on the amount of rent payable. Such allowances are immediately handed over to landlords (who are usually not in need of welfare) and allow landlords in more expensive areas to charge higher rents than they could otherwise charge, thus exacerbating the problem that rent assistance is meant to solve.
The income tax threshold, in combination with the progressive scale of tax rates, is the basis of numerous tax-minimization schemes by which the wealthy avoid paying their fair share of tax. Through various corporate intermediaries and contractual devices, income can be split between family members and between financial years, taking multiple advantage of the threshold and shifting income into lower tax brackets. One advantage of the proposed General Rebate is that it could replace the threshold and allow the taxation of all market income at a single rate, rendering all such tax-minimization schemes ineffectual.
At present, the welfare system applies means tests on a family basis in order to minimize payouts, while the tax system handles deductions on an individual basis in order to maximize revenue. Inconsistency breeds contempt. Using the GR as a substitute for the income tax threshold would effectively end the inconsistency, because a family would pay the same tax whether its members were treated individually or collectively.
A modest GR can replace a substantial tax-free threshold. For example, if the flat tax rate is 30 percent, a GR of $6000 per annum is equivalent to a threshold of $20,000 per annum with the proviso that if annual income is below the threshold, the “taxpayer” receives 30 percent of the shortfall as a negative income tax (NIT).
Abolition of the threshold reduces the marginal tax rate required to fund the GR and supplementary benefits. This observation, on top of the earlier observation that all income tests are hidden income taxes, further debunks any suggestion that non-income-tested benefits are prohibitively expensive.
Abolition of the threshold would also reduce compliance costs for employers by eliminating employment declaration forms and simplifying the computation of PAYE tax. Reducing costs for employers means more jobs.
Objection: “Under the SMT, a family owning a vacant lot
and saving money to build a house on it would lose benefits
because of the rental value of the land.”
Response: Under the present system, the same family would lose benefits because of earned income, and might be unable to increase their saving rate because of poverty traps. There would be no poverty traps under the SMT.
“A poor widow on the pension, living in the house that
she has owned for 50 years, would lose part of her pension
because of the value of the land under the house. If that land
had increased in value because of gentrification of the
neighbourhood, she would lose even more through no fault of her
own. She would have to sell the house!”
Nobody seems to be troubled by the other poor widow who does not own a home to live in or sell, and who consequently loses part of her pension in house rent as well as land rent.
Nevertheless, if the home-owning widow needs the full pension, she can have it — and the abatement due to the value of her land can be allowed to accumulate as a lien against the land until it is sold, gifted or bequeathed. In cases of hardship, the same treatment can be extended to any other customer who has no reasonably disposable assets apart from his/her principal place of residence. This concession involves little or no additional cost to the taxpayer.
If the home-owning widow were allowed to receive the full pension without any such lien, the real winners would be her heirs. What other kind of debt against an estate is written off for the sake of the heirs? The welfare budget should not be used to ensure that the widow's lucky heirs can inherit her property without encumbrance, especially when there are other people in this country who cannot afford, and will never be able to afford, to own any real estate!
“By taking benefits from residential landlords, the SMT
would reduce the supply of rental accommodation.”
The objection confuses land with buildings. The SMT cannot deter the construction of dwellings because it is levied on land, not buildings. Neither can it reduce the supply of residential land, because the total supply of land is fixed, while the amount zoned for residential purposes is determined outside the market. But, by imposing a cost (in lost benefits) on the holding of land, the SMT would encourage private landowners to build dwellings and install tenants on whatever residential land they own, in order that the rent might cover the holding cost. Thus the SMT would increase the supply of residential accommodation.
“The Single Means Test would increase residential rents
as landlords recovered their losses from tenants.”
First, the landlords of most residential premises would not qualify for any benefits anyway. Second, individual landlords would be restrained by competition from corporate and government landlords who are not affected by social security payments or abatements thereof. Third, assets tests on houses and income tests on house rents discourage the building of houses, hence reduce the supply of houses, hence increase house rents; and I propose to abolish such tests. Fourth, the objection confuses land area with land value. Land area taxes can be shifted onto tenants, because they cause some land to become economically unusable, thereby artificially restricting the supply of usable land. Land value taxes have no such effect, because marginally usable land has no market value and pays no tax.
Maintaining equity, simplicity, transparency and sustainability
Applying a Single Means Test to the aggregate of benefits payable to each family promotes horizontal equity: a person is not given different treatment solely by reason of being on a different benefit.
Simplicity and transparency are improved by having one means test instead of many, and improved further by reducing the variety (but not necessarily the availability) of benefits. Moreover, because the valuation of land owned by a recipient is not likely to change from one fortnight to the next, whereas the income from casual employment is almost certain to change, a Single Means Test based on land values would reduce the administrative workload, the risk of mistakes and the opportunity for fraud.
Equity, simplicity and transparency are important ingredients of sustainability inasmuch as they minimize resentment and suspicion among voters.
Establishing better incentives for people receiving social security payments, so that work, education and training are rewarded
A Single Means Test based on land values would allow recipients to work and earn income without suffering any abatement of benefits. Similarly, recipients who improved their earning capacity through education and training would not suffer abatement as soon as they started earning more. In short, the rewards for effort and activity would not be taken away.
But the benefits would still be targeted. As recipients earned more income and more job security, they would want to acquire house-land packages in more desirable locales and would thereby lose benefits. Similarly, they would lose benefits in the event of unearned increments in the value of their land.
Creating greater opportunities for people to increase self-reliance and capacity-building, rather than merely providing a passive safety net
The chief reason for passive behaviour under the present system is income testing. The problem of poverty traps has already been mentioned. Furthermore, the position of a Newstart recipient who finds a few hours' paid work is much worse than is suggested by EMTRs alone, because any wages earned in the present payment period cause a reduction in the next Newstart instalment even if the wages are not paid until weeks afterwards. Hence a short work assignment causes a cash-flow crisis. The recipient therefore has a powerful incentive to reject and conceal any offer of employment unless it is substantial and continuing, with reliable periodic payment of wages. Thus the income test not only encourages passivity, but also teaches recipients — many of whom are young and impressionable — that it pays to be dishonest! In the absence of income testing, no such problems would exist.
Expecting people on income support to help themselves and contribute to society through increased social and economic participation in a framework of Mutual Obligation
The reforms proposed in this submission do not compromise Mutual Obligation in any way. Activity tests are retained. The problem with the present system is not that activity is required, but that successful activity is penalized by confiscatory income tests!
Providing choices and support for individuals and families with more tailored assistance that focuses on prevention and early intervention
The best form of prevention or early intervention is to create more jobs. The best choice to offer new jobseekers is “Which of all these job offers shall I take?” And yet, reading about the policies of successive governments on the problem of welfare dependency, one is left with the overwhelming impression that governments are prepared to do anything and everything to help the unemployed except create more jobs.
The Single Means Test would create jobs by
- encouraging productive investment rather than speculative acquisition of land,
- encouraging landowners either to use their land productively or to sell it or let it to someone who will, hence
- making small business more viable by reducing the up-front or overhead cost of access to land.
Subsequent rises in land values due to economic growth would not squeeze business, because such rises would be driven by capacity to pay, not speculation.
Maintaining the Government's disciplined approach to fiscal policy
In general, fiscal discipline means no increase in expenditure without a corresponding increase in taxation. Under the present Government, it probably also means no increase in taxation.
If all means tests were abolished in favour of increased taxes on income and capital, the “increase” in taxation would be apparent rather than real, because of the equivalence between means-testing and taxation. But this submission does not even call for the abolition of means tests. In effect, it calls for the abolition of income tests and a tightening of assets tests; the Single Means Test is an assets test restricted to unimproved land values, with no threshold.
One essential ingredient of fiscal discipline is a strong economy, which gives a robust tax base capable of supporting the required level of government expenditure without excessive tax rates or deficits. To that end, means tests must not create any destructive incentives or disincentives that would inhibit economic growth. The Single Means Test is based solely the unimproved value of land, which value is created by the community and not by the person subject to the means test. Hence the person cannot fight against the means test except by selling the land (thereby avoiding the means test) or letting the land (thereby obtaining rent to offset the loss of benefits) or using the land productively (thereby earning income to offset the loss of benefits); in each case, the effect is to increase the availability of land for productive uses. Thus the SMT would promote economic growth, not inhibit it.
(a)(i) Options for change to income support arrangements aimed at preventing and reducing welfare dependency by those of workforce age
The proposed SMT, unlike existing income tests, cannot discourage welfare recipients from working or from improving their employability, because it ignores the proceeds of work — unless those proceeds are spent on land.
(b)(i) The broader application of Mutual Obligation
We hear a great deal about Mutual Obligation for the unemployed, but very little about Mutual Obligation for employers. Federal expenditure on “industry welfare”, including direct expenditure and tax expenditures (forgone revenue due to tax concessions; see note), runs to about $10 billion per year — an amount comparable with the Defence budget or the Federal education budget. In theory, or at least in political debate, such assistance is provided for the purpose of preserving Australian jobs. In practice, very little is asked of industry in return for assistance. If any industry assistance is given, it should be given in the form of wage subsidies for new employees, so that employers who do not create jobs do not receive assistance.
Similarly, we hear very little about Mutual Obligation for landowners, although landowners have exclusive control of a resource which they did not create, and which some of them have acquired at little or no historical cost. In return for this privilege bestowed by the State, the SMT exerts mild pressure on landowners not to waste economically valuable land.
Note: The term tax expenditure acknowledges that tax concessions are equivalent to expenditure items for all practical purposes, except that
- tax concessions are subjected to less public and Parliamentary scrutiny, and
- tax concessions are off-budget, giving the illusion of lower expenditure and lower taxation.
Applying the same logic to the means-testing of welfare payments, we see that means tests are equivalent to taxes for all practical purposes, except that
- means tests are subjected to less public and Parliamentary scrutiny, and
- means tests are off-budget, giving the illusion of lower taxation and lower expenditure.
Accordingly, means tests ought to be called welfare taxes. But they are not; we are more honest about tax concessions than about means tests. [Back to text.]
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