poverty and income maintenance policy in australia—a review article

Poverty and Income Maintenance Policy in Australia-A Review Article*

HUGH PRITCHARD and PETER SAUNDERS Kuring-gai College of Advanced Education

Lindfield, NSW 2070

Pover ty in Australia,’ the Commission of Inquiry into Poverty’s First Main Report (here- after the Henderson Report, HR) , measures the extent of poverty and examines methods of meeting poor people’s needs for income, housing and welfare serqices. The Report’s recommendations are based on three principles: ‘first . . . that every person has the right to a basic level of security and well being . . . second . . . that every person should have eqiial opportunity for personal development and participation in the community [and] third . . . that need, and degree of need, should be the primary test by which the help given to a person, group or community should be determined’ [HR, p. 21.

The first two of these principles reflect the philosophy of the Report. The basic level of financial security is defined in terms of the general level of incomes in the community. Thus poverty is seen as a relative concept. BIYSOR characterizes the second principle as ‘a weak definition of equality since it em- phasizes equality of opportunity rather than basic changes in societal structures. . . . Views about equal opportunity should be seen as associated with a liberal political philosophy which basically accepts the current form of society, but sees some aspects as dysfunctional, pathological or unjust’ [Bryson, 19761. The third principle implies that increases in the basic benefit rate should have priority over the

* We would like to thank Peter Groenewegen, John Lawrence and Roger Sebel for their comments on an earlier version of this paper. The u ~ a l caveats apply.

1 Australian Government Commission of Tn- quiry into Poverty, First Main Report, Ronald F. Henderson, Chairman, Poverty in Australia (AGPS, Canberra, 1975, Vol. 1, xxi + 363 pp., Vol. 2 , xi + 104 pp.). Unless otherwise stated, page references to the Report refer to Vol. 1.

University of Sydney Sydney, NSW 2006

easing of the means test. Attempts to incor- porate the insurance analogy and compensation principle within the Australian social security system (e.g. National Committee of In- quiry into Compensation and Rehabilitation [ 19741, National Superannuation Committee of Inquiry; Majority Report [1976]), are regarded a5 unfortunate.

The main stress in the Report is on financial considerations. Adequate income is seen as important in achieving well-being and freedom of choice. Money is regarded as more efficient than a complex range of services in aiding low-income people, although the provision of some services is seen as essential. ‘Poverty is seen as a result of structural inequality within society. . . . Inequalities of income and wealth “reinforce and are reinforced by inequalities of educational provision, health standards and care, housing conditions and employment conditions and prospects”’ (Barker [1972, p. 661 quoted in [HR, p. viii]). Although noting the need for adequate services, the Report cautions against the growth of an expensive welfare bureaucracy. In dealing with problems of housing and employment, there is need for government subsidies. Generous subsidies are recommended for a wide variety of self-help groups .z

The Extent of Pover t y As indicated above, the HK views poverty

as a relative concept. The use of this concept has important implications, not only for the definition of the poverty line and hence the measurement of poverty, but also for the appropriate policy responses; thus it is important

2 The HR is, in turn, criticized by the Priorities Review Staff for proposing too many schemes in addition to the guaranteed minimum income scheme (Priorities Review Staff [1975, p. 111).

17

18 THE ECONOMIC RECORD APRIL

that the HRs recommendations be viewed in conjunction with its definition of poverty.

The poverty line used in the HR was obtained by updating the poverty line used in the 1966 Melbourne poverty survey (by Henderson et al. [1970]) in line with the growth in season- ally-adjusted average weekly earnings. In the earlier survey, the poverty line for a standard (two-child) family was defined to be a little above the then basic wage, plus child endow- ment payments. Poverty lines for families of different compositions are then obtained from a set of family equivalence scales relating expenditure to family composition. The method adopted in the Report has been the subject of criticism by the Priorities Review Staff El9751 and Sebel [1976]. The former argue that u p dating the poverty line by average earnings growth ignores the effects of fiscal drag on the non-poor and thus produces a rising relative net poverty line. This argumcent does not itself present the full picture, since it considers only the changing incideoce of the personal-income taxation system. If we wish to consider the after-tax relative positions of groups in different income ranges then we need to include also the effects of the indirect tax system (which the studies of Bentley, Collins and Rutledge [1975] and Podder and Kakwani [1975] have shown to be generally regressive, particularly at the bottom of the income scale). In addition, we need to consider the incidence of public expenditures about which little is known at present. Furthermore, as Thomson 119761 has shown, the composition of Commonwealth taxation has been changing quite dramatically in recent years, and this is another factor which needs to be incorporated. Thus, attempting to define income levels which maintain the relative command of the poor over both private and public goods is a very complex problem which requires fuller investigation than either the HR or the Priorities Review Staff have given.

Sebel’s main criticism concerns the use of family equivalence scales derived from the family expenditure patterns of New York families in 1954 which were used due to the unavailability of any comparable Australian data at the time of the national Income Survey in 1973. This procedure is likely to produce some distortions in the findings. Sebel was also critical of the omission from the ‘.definition of

income of the imputed income from owner- occupied housing.

These criticisms aside, the results from the national Income Survey indicate that, in 1973. 10.2 per cent of adult income units containing 8.2 per cent of the population were below the poverty line. These figures account for over a quarter of a million dependent children in poverty. A further 7.7 per cent of income units had incomes less than 20 per cent above the poverty line. After allowing for housing costs,3 a prime factor contributing to poverty in many cases, the number of income units below the poverty line falls to 6.7 per cent containing 6-4 per cent of the population. Poverty is closely associated with certain ‘disabilities’. Of all income units in poverty after housing costs, the aged accounted for 20.7 per cent, single parent families 14-5 per cent, single females 14.1 per cent, and the sick, invalid and unemployed 8.7 per cent. However, 23.6 per cent of the poor exhibited none of a list of disabilities commonly associated with conditions of poverty.

Table 1, showing data on selected member countries of the OECD, gives some international perspective to the Australian figures.

International comparisons of poverty are fraught with conceptual and statistical difficulties. However, the results based on the standardized poverty line calculated by OECD are the best currently available. On the basis of these findings, Australia falls in the middle range.

Intertemporal comparisons of poverty for individual countries such as United States and Great Britain and comparisons of poverty in Melbourne in the 1966 and 1973 surveys suggest there is no apparent inbuilt tendency for

3Income for these purposes is defined net of housing costs; housing costs are defined as follows: ‘For non-boarders. housing costs were whatever was paid in rent or instalments and in land, water and sewerage rates. For owner-occupiers and buyers, no allowance was made for insurance or repairs and maintenance. For boarding income units (both professional and family boarders) the cost of housing was regarded as the total board payment less $7 for each income unit member to allow for the extra cost of food. etc., incurred by the householder. For householders with either professional or family boarders, the same figure of $7 per person was deducted from any board receipts, and the net figure then subtracted from the other housing costs incurred by the householder’ (HR, Appendix F, pp. 353-54).

1978 POVERTY REPORT: A REVIEW 19

T ~ L E 1

Poverty in Selected OECD Member Countries

Country Poverty Line as a Percentage of Private Disposable Income

per capita For One For Two For a Famiry

Person Persons of Four

Per Cent of the Population

Below the Poverty Line

Per Cent of the Population

Below a ‘Standardized’ Povero Line*

Australia (1973 65.1 87.1 122.2 Belgium (1972) Canada (1972) France ( 1972)

56.3 92.3 131.0 74.7 124.4 174.2 29.8 59.6 92.7

Germany (early 1970s) -- - - Sweden (early 1970s) - - - United Kingdom (1972) 78.4 112.5 154.3 United States (1972) 63.0 81.3 123.7

ma. = not available Sources: OECD r19761. Tables 26. 27.

8 .2 14.4 15.1

15.0-20.0* n.a. n.a. 13.2 11-9

8 . 0 ma. 11.0 16.0 3 . 0 3 .5 7.5

13.0

*The ‘Standardized’ poverty line was obtained by rounding the unweighted average of the poverty line definition for each individual country, excluding France. The resulting poverty lines for the one person, two person and four person units were respectively 66.7 per cent, 100 per cent and 145 per cent of the average per-capita disposable income.

relative poverty to decline as economic growth proceeds; ‘the growth of the economy does not automatically abolish poverty. . . . We require deliberate policies to eliminate poverty’ [HR, P. 71.

The Current Social Security System It is clear from the extent of ,poverty in Aus-

tralia, as measured in the Report, that the present social security system has not provided Australia with adequate income security. There are many reasons for this, but a major one has been the failure to raise pension and benefit rates to the poverty line, and then index them to the living standards of the rest of the community. Correcting this failure, plus an expansion of coverage to include all those in need, is the basis of a number of sensible recommendations made to improve the then existing system. As Table 2 indicates, however, the recent changes (November 1976) in pension and benefit rates still leave many recipients short of the updated poverty lines, and the commitment by the Federal Government in the 1976-77 Budget to adjust the rates automatically in line with the CPI movements will not maintain the relative position of the poor (assuming a positive growth in real earnings).

A number of additional improvements suggested in the Report have been at least partially

implemented since its publication, the most important being the replacement of conces- sional tax deductions for dependent children by the new Family Allowance scheme (a move which has been of great value to low income, large families) and the standardization of pension and benefit rates. These and many other suggestions form the basis of a piecemeal programme of reform of the existing system.

The present income maintenance programmes are seen as impressive in their unity and the Report has ‘a lively appreciation of the strengths of the existing provisions. By and large they provide for a transfer of income from those who have enough to those who otherwise would have very little, with very few extraneous flows of funds’ [HR, p. 671. Never- theless, the Report criticizes the present system as based on categorization with its divided administration leading to a lack of policy co- ordination. This, in turn, produces in Australia, as elsewhere, poverty traps (to which the separately administered personal-income taxation system contributes), stigmatization resulting from the selectivist philosophy which underlies the means test and a general feeling that the bureaucracy runs on principles of administrative efficiency which are sometimes in conflict with the system’s clients. The HR


TABLE 2

Pension and Benefit Rates and Poverty Lines, November I976

Poverty Line*

Family Composition August November Pension1 Benefit Rates plus Family Percentage (b) m a

1973 1976 Allowances, November 1976 of (a) ($1 (a) ($1 ( b ) ($1 %

Single Person 27.0 46.0 Married Couple 38.3 65-2 Married Couple, 2

Children 56.4 96.1 Married Couple, 4

Children 76.4 130.1 Married Couple, 6

Children 91.6 156.0

43.5 72.5

96.0

123.0

152.0

94.6 111.2

99.9

94.5

97.4

*The poverty lines have been updated in line with the growth in average weekly earnings, and assume that the family head is not working.

concludes that reform within the existing frame- work will not solve these problems (contrary to Professor Henderson’s views in 1971 when he argued that ‘in Australia it seems that a piecemeal approach is preferable’, Hender- son [1971, p. 1121) but that, in the medium term ‘it is possible by moderately radical reform to provide a single system combining social security and taxation which is a considerable improvement on the present arrange- ments’ [HR, pp. 69-70].

Guaranteed Minimum Income The integrated approach recommended in

the HR takes the form of a guaranteed minimum income (GMI) scheme. The guaranteed income depends on the composition of the income unit. Were Australia to introduce such a scheme, she would be a pioneer. She is particularly well placed to do so as, unlike most European and North American countries, she is not locked into social insurance type schemes, with their highly visible earmarked taxes. Such schemes tend to ensure that the bottom 20 per cent of the population get a relatively small proportion of total payments.

Income guarantee schemes fall into two main types, which we shall classify as Social Divi- dend (SD) type and Negative Income Tax (NIT) type. Typically, SD pays a grant to every income unit and all private (non-grant) income is subject to tax. Those with low private incomes receive more in grant money than they pay in tax; this is not the case with higher in-

come earners. (The GMI scheme proposed in the HR is of this type.) NIT increases the income of those on lower private incomes by supplementary grants (or negative taxes), per- haps paid via a tax-credit system. Those with higher incomes pay positive tax and receive no grants.

It is possilble to construct SD and NIT schemes that are identical in many of their effects (same final income at all initial income levels, same marginal rate of tax, same average rate of tax), even though the gross flow of funds through the public sector will be much greater under SD than under NIT. One of the great advantages of SD is that regularity of payment is ensured no matter what fluctuation in private income occurs. This is not so easy to administer under NIT. This distinction is important and is not always perceived. Thus, the majority report of the National Superan- nuation Committee of Inquiry (Final Report, Part 1, paras 2.17, 2.19) regards both the Henderson GMI scheme and the Priorities Re- view Staff tax-credit proposals (a NIT scheme) as being.NIT schemes. Both schemes are criticized in that ‘they do not ensure that people in need of regular income receive it as they require it’. Yet, the Henderson scheme is designed to do just that, and is not, by our classifkation, a NIT scheme.

The proposed GMI scheme is similar to the ‘demogrant’ scheme proposed in the United States and the United Kingdom SD scheme, initially proposed by Lady Rhys-WiUiams in

POVERTY REPORT: A REVIEW 21 I978

1942, and recently suggested in a modified form by Meade [1972]. The HR scheme provides an automatic payment to all income units each fortnight, which would replace the existing plethora of pensions and benefits. In- tome is taken as the sole measure of needs, and the scheme is financed by a proportional tax on all income other than the GMI payment. The combination of the proportional tax and the flat rate GMI payment would make the system progressive. The scheme thus represents complete integration of the social security and 2ersonal-income taxation systems. In the fol- ‘owing discussion, we will concentrate on the srecise scheme proposed in the HR, and we \hall use the figures which applied at August 1973.

The proposed scheme cohsists of GMI payments to categorical units, consisting of existing pension recipients, the sick and the unemployed, equal t o 106 per cent of the poverty line, and payments to all other units, referred to as non-categorical units, equal to 62 per cent of the poverty line rising to 71 per cent of the poverty line for larger families. A proportional tax rate of 40 per cent is proposed supplemented by a surtax on the top 5 per cent of income units. The tax rate is sufficient to finmce the net costs of the GMI payments, and to provide a contribution towards general government revenue equal to the net contribution fiom the income tax in 1972-73. The tax rate is clearly related to the level of the GMI payments and can be calculated from the general formula,

where subscripts i and j refer to categorical and non-categorical units respectively, R refers to the numbers in each group, r[ the proportion of the poverty line paid as GMI, ^p the poverty line, the revenue from income taxation required for general purposes, s the surtax revenue and Y the income base. Under the proposal preferred in the Report, TT, = 1.06, xj = 0.62 and t = 0.40. A proposal in which xi = rrj = 1.0 requires r = 0.50, a figure not unlike that calculated by Meade [1972] of 0.53 for a similar scheme in 1970 for the United Ktngdom. The above figures €or Australia exclude the self-employed, a group whose incor-

poration in the GMiI scheme presents parti- cuIarIy diffcult problems.

The GMI scheme is selectivist, concentrating the greatest net payments on those with least private income, and, hence, in line with tradi- tional Australian principles; its major advantage is that by paying the GMI payments automatically and universally, and using the income-tax system to collect revenue, i t neatly avoids the usual problems associated with the selectivist approach. All individuals pay tax on all private income and all receive the non- categorical entitlement automatically (categorical units are required to apply for their higher guarantee). Most importantly, the system is coordinated and simple to under- stand and to administer. Some forms of categorization still exist under the proposed scheme (ACOSS [1976]) and those entitled to the higher payments would be required to claim for them. Even so, everyone will automatically receive payments at the lower level, and this is a major advantage of the scheme. The scheme is not without its problems at the conceptual level, and, to be effectively operational, requires precise definitions of income and the family unit which must be acceptable for both income maintenance and income-taxation purposes (Saunders [1976], Treasury [1974b]).

In the following discussion of the GMI scheme we focus on five areas: transition problems, redistributive consequences, efficiency and social values, the incentive question, and the scheme’s effect o n economic policy.

(i) Transition Problems The proposed GMI scheme requires an increase in the flow of funds through the public sector of approximately $5,200m. This is an enormous figure of little relevance for the individual who will be affected both by the proportional tax rate and the size of the guaranteed payment. The proposed GMI is self-financing as explained above. It is estimated that ‘had the scheme been operating in 1973 and provided that differences in incentives between the scheme and the present system had not led to large differences in such variables as private income earned and income unit composition’ [HR, p. 761 it wouId have achieved a further redistribution of about $900m a year from people

22 THE ECONOMIC RECORD A P W

with higher to those with lower incomes. This type of redistribution is central to ahy attack against relative poverty, the objective of which is to reduce the gap in living standards between the poorest and the rest of the population. The achievement of this goaI must be paid for in reduced disposable income, by others. The proposed GMI scheme is financed out of consolidated revenue and pays flat-rate grants to the income unit. In theory, it would be possible to introduce such a scheme over- night. In practice, as the HR is well aware, the power of government to redistribute income is rather more limited. The Report argues that, ‘The majority of the Australian population who are not poor, resent reductions in their income to effect a transfer to poor people. . . . [However], if the scheme were financed from the increase in national income, very few people need experience a fall in disposable income through its imple- mentation, though some would find their disposable income rising more slowly than before’ [HR, pp. 7,781. If, on the introduction of the GMI scheme, a particular income group suffers substantial loss of income, and pushes for increased earnings, there is the danger of a vicious wage-price spiral, made the more intractable

because the grant is geared to average weekly earnings. The transition problem is, therefore, to arrange a re-structuring in the profile of disposable incomes in the years prior to the introduction of the GMI so that particular income groups do not feel a large loss of disposable income on the introduction of the scheme. Fiscal drag is mentioned as ‘the mechanism of transferring increases in national real income from the recipient to the government for redistribution’ [HR, p. 8, n. 11. In addition, improvements in the existing system, including the lifting of benefit rates to the poverty line, are seen as facilitating the introduction of the GMI scheme. However, with the introduction of income- tax indexation fiscal drag will be much less. In addition, it is unlikely that iiscal drag with unrestructured tax rates and the raising of grants to the poverty level would produce an outcome sui€iciently close to that required at the introduction of the scheme. There- fore, thought would need to be given to re-structuring the tax rates during the transition period so as to facilitate such similarity of outcome. In addition, the HR was unable to explore the difficulties which would be encountered by the necessary inclusion of the self-employed in the scheme. The Report

TABLE 3

Disposable Income Under the GMI Scheme as a Percentage of Disposable Income Under Present System (August 1973)

Couple Couple Couple Widowed Income Single (One Works) (One Works} (One Works) Single Pensioner Pensioner Unit Adult N o Children 2 Children 4 Children Pensioner Couple 2 Children Poverty

Private Income ($1

Line * $33.4 $44.7 $62.7 $80.7 $27.0* $38.3’ $45,6*

0 - - - - 136 123 127 20 143 180 214 233 97 101 104 40 110 126 141 158 105 94 99 66 80 100

_. ~ _ - ~

98 109 i20 132 i i s 100 105 92 100 109 118 109 106 111 90 96 103 110 1 04 116 116

200 91 92 95 97 95 105 111

*The asteriskcd figures assume that no member of the income unit is working; in other cases the head is assumed to be working. Source: HR, Vol. 2, Appendix 6, Table 6.26.


TABLE 4(A)

The Percentage Change in Disposable Income Resulting from a Self-financing Increase of 10 per cent in all GMZ Payments; August 1973

-- Widowed

lncome Single Married Couple Couple Single Pensioner Pensioner Unit Adult Couple 2 Children 4 Children Pensioner Couple 2 Children

Private __ __ Income (%)

. I

0 20 40 60 80

100 200

10.00 10.00 10.00 10.00 3.87 5.08 6.25 7 .10 1.35 2.64 4.03 5.15

-0.02 1.17 2.56 3.76 -0.88 0.19 1.52 2.71 -1.47 -0.50 0.74 1.90 -2.88 -2.24 --1.36 -0.44 -

10.00 10.00 10.00 5.66 7.00 7.08 3 . 3 1 5.01 5 - 1 3 1 . 8 3 3.61 3.74 0.81 2.56 2.69 0.07 1.74 1.87

-1.84 -0.56 -0.46

Private: income equal to Poverty Line* 1.99 2.23 2 .40 2.68 4.69 5 . 1 6 4 .70

* As defined in Table 3.

is 'conscious that [the scheme] cannot be implemented until much more attention has been given to its details and ramifications' [IIR, p. 671.

( i i ) Redistributive Consequences The redistributive consequences of the GMI scheme as at August 1973 are illustrated in Table 3 . The scheme primarily redistributes iricoinc down the income scale, from single adult and childless couples towards families and pensioners. It is also clear that the net beneficiaries of the scheme include many income units well above their re- spective poverty line. For example, the standard (two-child) family on average weekly earnings of $111 in August 1973 benefits under the GMI by $1.35 per week. (The break-even income level under the scheme, defined where income tax paid equals the GMI received, is equal to 1.06/0-40$ = 2.65 times the poverty line for categorical

income-taxation system, although such aims could be pursued through other fiscal channels. This is a natural consequence of the simplified linear income-tax system which gives the government only two redistributive policy instruments, the GMI level, which is universal, and the tax rate, which applies to all private income. Raising the former would be prohibitively expensive, whilst lowering the latter would be regressive. The only revenue-neutral method of additional downwards redistribution would involve dual change in both the GMI level and the tax rate. As an illustration of the com- bined effects, we examine the consequences of a 10 per cent increase in the GMI payment. If this applies across the board, it requires an increase in the tax rate by 2.8 percentage points, while, if it applies only to categorical income units, the tax rate must be raised by 1.0 percentage points4-

4 Since the break-even income level, ? is equal . . . rate, i t follows that = G - t where dots repre- sent percentage changes. n u s , in the first case, the break-even income level rises by 10.0 - 7 . 0 = 3 . 0 per cent, whilst in the second case the break-even income level for categorical income

poverty line for non-categorical units.) Whilst the introduction of the GMI scheme would involve substantial redistribution of income, once the scheme is in operation it restricts considerably any further redistributive possibilities operating 'through the units it fails by 2.5 per cent. units rises by 7 . 5 per cent, and for non-categorical


the calculations are presented in detail in the Appendix. The redistributive consequences of the two changes are shown in Tables 4(A) and 4(B) . As can be seen from Table 4(A), the tax bite quickly reduces the benefits of the increased GMI payments. The non-categorical units with private income equal to the poverty line benefit by between 2 per cent and 2.5 per cent, whilst categorical units with poverty line private incomes benefit by between 4.5 per cent and 5 per cent. Attempts to restrict the increased payments to the categorical units only produce a greater net benefit for them ,(particularly higher up the income scale) but have the effect of reducing incomes of most non- categorical units who are below the poverty line. These examples illustrate how difficult it becomes under the GMI scheme to direct additional resources . in a revenue-neutral change to those at the bottom of the income scale unless large increases in the GMI payments are made. Even in this case, the increase in the tax rate required may not be acceptable-it is already quite high at 40 per cent. It will be much easier, however, to subtract

resources from the poor simply by not adjusting the GMI payments in line with earnings (or price) movements. More importantly, income redistribution under the GMI scheme would not be made easier by a positive growth rate. This is because the GMI payments would be presumably increased in line with the growth of incomes generally, otherwise relative poverty would increase. This would totally absorb the additional resources which growth provided, assuming that and s in (1) also grow at the same rate, so that the tax rate would be constant. The comments made in Chapter 2 of the HR on the need for additional expenditure on health, education and welfare services suggest that 2 might be expected to rise at a faster rate than national income, unless there are offsetting reductions elsewhere, in which case the tax rate would also have to be raised. Ignoring this possibility, however, it is quite clear that growth indexation of the GMI payments automatically fixes the distribution of net incomes in the community and reduces the scope for additional discretionary redistributive policy. Similar views to the above have been ex- pressed in the United Kingdom by Atkinson [I9731 during the discussions following the

TABLE 4(B)

The Percentage Change in Disposable IncoMe Resulting f rom a Self-financing Increase of 10 per cent in GMI Payments to Categorical Units only; August 1973

Widowed Income Single Married Couple Couple Single Pensioner Pensioner Unit Adult Couple 2 Children 4 Children Pensioner Couple 2 Children

Private Income (%)

0 0.00 0.00 0.00 0.00 10.00 10.00 10.00 20 -0.70 -0.56 -0.43 -0.33 6.55 7.61 7.68 40 -0.98 -0.84 -0.68 -0 .55 4.68 6.03 6.13 60 -1.14 -1.00 -0.85 -0.71 3.50 4.91 5.02

-1.24 -1.11 -0.96 -0.83 2.69 4.08 4.18 3.54 100 -1.30 -1.19 -1.05 -0.92 2.10 3.43

200 -1.46 -1.39 -1.29 -1.19 0-58 1.60 1.68 80

Private Income equal to Poverty Line* -0-90 -0.89 -0.87 -0.83 5.78 6.15 5.78

* As defined in Table 3.


green paper on the Tax Credit Scheme [1972].

(iii) Eficiency and Social Values As stated above, the break-even income level is 2.65 times the poverty line for categorical units and 1.55 times for non-categorical units. Many would regard this as inefficient. Efficiency is defined as the achievement of a policy goal-at least cost. But what is the goal? One view of the goal is reduction of the ‘poverty gap’, defined as ‘the total shortfall of income from the poverty line received by all the poor’ (Perlman [1976, p. 111). This implies that the most efficient (apart from any disincentive effects) manner in which to close the poverty gap is to set a tax rate of 100 per cent on all private incomes up to the poverty line. Any lesser rate results in a spill-over of benefits to those not in poverty. In contrast, a great attraction of the HR proposals is that everyone is subject to the same basic tax rate and grant payment, thus abolishing stigma. A ‘second view of the goal‘, as stated by Barker, ‘starts from the premise that poverty and inequality are conceptually inseparable: the total social structure is permeated by massive and systematic inequalities of income and wealth. . . . Poverty is the extreme mani- festation of this structural inequality. . . . What is needed is a much broader and more determined assault on all the areas of inequality, in which priority is given to the removal of the worse inequalities’ (Barker 11972, p. 661). Seen from this view, the spillovers of the Henderson GMI are a part of a tax-transfer system which compresses the dispersion of disposable income. Thus the effect of the HR proposals is to reduce both poverty and economic inequality in a society in which ‘poverty is seen as a result of structural inequality’ [HR, p. viii].

(iv) Work Incentives One major shortcoming of the Report is the inadequate coverage given to the work incentives issues. I n an early discussion of the NIT experiments performed in the United States, Harold Watts commented:

‘The experiment has been designed primarily to investigate the leisure/ work choice, largely because of the relative

economic importance we place on it, but partly also because fears about work effort implications loom so large in the minds of the public at Iarge and the politician in particular’ (Watts [1969], p. 465).

Such fears exist with at least as much force in Australia, and they would undoubtedly weigh heaviIy in any political decision. The Taxation Review Committee [1975, para. 13.161 cited the harmful effects on incentive to work and save as major economic ob- stacles to any negative tax scheme in Aus- tralia. The HR acknowledges the importance of the incentives question, and implicitly recognizes an upper limit of 50 per cent on the proportional tax rate, although it is not clear whether this is due to economic or political considerations. Despite considerable refinement the underlying economic theory of the work-leisure choice has provided no unambiguous answers to the work incentive question, whilst many have criticized its essentially static approach (Rolph [1969]; Rees [1974]). The HR makes much of the desirable implications for the work behaviour of the poor resulting from the uniform tax rate and the abolition of poverty traps, but the important consideration is the change in both the marginal and average tax rates facing individuals when the scheme is introduced. Thus one must consider the labour supply responses of all individuals, and not just the poor, since almost all individuals will experience changes in both their average and marginal tax rates when the scheme is introduced, and hence both income and substitution effects will operate. The generalized effects, as at August 1973, are summarized in Table 5. The aggregate effect depends upon the overall response within each group, and the size of the groups. For those higher up the income scale, there is a likely incentive effect, for those in the lower income range, a likely disincentive effect, and the effect on those at the bottom of the income scale is uncer- tain. The substitution effect would be particularly strong for the lower middle income group, with the marginal tax rate rising from between 25 per cent and 35 per cent (in 1973) to 40 per cent and, given the large numbers in this group, this disincentive effect could easily offset the potential incen-


TABLE 5

Work Incentive Responses to the Introduction of the GMI Scheme

Approximate Change Income Change Substitution Overall Income Income in Effect on in Effect on Effecr on Group Ran&? Average Hours Marginal Hours Hours

(Sp.a.1 Tax Rate Worked Tax Rate Worked Worked

? + + + + +

(- represents a decrease, + an increase; the marginal tax rate is assumed to decline for the

- - - -

- + - - Low 0- 3000 Lower Middle 3000- 6000 -

- Upper Middle 6000-12000 + + High over 12000 + + very low income group due to the abolition of poverty traps).

tive effects experienced elsewhere on the income scale. The essential point is that the incentive issue requires the consideration of all individuals, and not just existing welfare recipients. Turning briefly to the empirical evidence, a recent study by Brown and Levin 119751 suggested that the positive tax system re- sulted in a small increase in the overtime working of weekly paid workers in Britain. Rees [1974], summarizing the results of the United States NIT experiments, states that there is an overall disincentive effect which is significant, but not large, concentrating mainly on the labour force participation rate of white wives. He suggests that the disincentive effect may add between 5 and 10 per cent to the total cost of the scheme. Other studies have produced different results, and Break [1975] has argued that this vari- ability is too large to be useful for the policy maker. There is at present no empirical evidence on the work incentive question for Australia; the results produced by the Family Centre Project on the incentives question '(Salmon [1974], [1975]) are only a relatively minor component of a much wider study, and are not directly relevant to the proposed GMI scheme.

(v ) Economic Policy and the GMI Scheme Whilst much of the discussion of the GMI scheme has inevitably focused on its implications for income maintenance policy, it also involves a major restructuring of the personal-income taxation system, and, given its importance, of the overall taxation sys-

tem. This has many implications although we focus here on two aspects. Fiscal policy becomes much less flexible under the GMI scheme for demand management purposes, since changes in the personal-income taxation system (ignoring its surtax component) simultaneously affect income maintenance objectives. Thus, attempts to restrain demand, either by lowering the GMI payment, or by raising the tax rate, will in each case have adverse effects on low-income earners, although their relative position would be improved in the latter case. The reduction in macroeconomic policy instruments could be a serious cause for concern if the policy alternatives are less attractive, particularly since the failure to achieve macroeconomic objectives, leading to conditions of inflation and unemployment, will have undesirable consequences for the living standards of the poor, as well as raising their number. At present the personal-income taxation system is indexed against inflation, and it is reasonable to assume that such a policy would be maintained under the GMI scheme. This can be achieved simply by raising the GMI payments in line with price movements, and this would simultaneously and automatically maintain the real incomes of the poor, another recent commitment by the Australian Government. However, such an arrangement is, as we have argued above, inconsistent with the relative concept of poverty on which the HR is based. This implies that the incomes of the poor be tied to the incomes of the non-poor, implying that the GMI payments move in line with


an appropriate index of incomes in the community. As we show above, this is possible in a growth situation, whilst holding a fixed tax rate, if and s in (1) also rise at the same rate of growth. However, since everyone receives the GMI payment, all incomes will be tied to average income growth so that those groups who attempted to improve their relative income positions directly would be partially frustrated by the resultant increases in the GMI payments. This could lead to further upward pressures on incomes with inevitable inflationary consequences.

Additional Recommendations While GMI is the main weapon for financial

poverty alleviation, the HR sees the need for additional measures. GMI provides the frame- work rather than the complete solution. There are considerable numbers of income units in poverty because of their low earnings. The Report urges the ‘extension of the Federal minimum wage to include occupations not pre- sently covered by Federal or State awards, the raising of the minimum wage in relation to average earnings, and more stringent enforce- ment of awards’ [HR, p. 1301. Indeed, if the GMI scheme is to lift non-categorical units above the poverty line, this pre-supposes a minimum level of earnings to the breadwinner. Employment is viewed not merely in financial, but also in personal terms-as ‘important for a person’s self image and his functioning as a member of a family and society’ [HR, p. 1281. The Federal Government is urged to pursue high employment levels not only by appropriate monetary and fiscal policies, but also by in- volvenient in training schemes, job creation programmes, and relocation assistance.

The Report argues that poverty can be caused by low income ‘but also by ill hedth, lack of education, inability to speak the Eng- lish language or ignorance of the legal system to name but a few, [HR, p. 881. Whilst money is of prime importance to poor people a minimum investment in community services is seen as essential. Welfare services mare currently provided variously by Federal, State and local government and by voluntary organizations. The overall picture of ‘the organization and provision of community services [is] one of poor planning, lack of integration, frustrated,

ignorant and humiliated users, and unmet needs’ [FIR, p. 931. An expansion of welfare services, primarily through local government and voluntary agencies, is recommended, as is the involvement of the users in running the services.

Throughout, the Report stresses the importance of housing costs in determining whether or not low-income families are in poverty. The extent to which government should engage in direct provision of housing for the poor, as opposed to granting cash supplements, is a perennial problem. The H R is aware of the danger posed by increasing special allowances for low-cost private rental accommodation- the ‘danger that . . . a special allowance will simply result in an increase in the price of the service’ [HR, p. 441. ’ However, the Report maintains that there is a positive supply response in the stock of rental accommodation, that ‘the market mechanism does operate, with imperfections, for private rental housing and suggestls] that many of the problems of low- income private renters result from their low incomes’ [HR, p. 1621. An increased payment rate of fortnightly Supplementary Assistance is proposed for pensioners who pay rent and who are almost entirely dependent on their pension. Tax credits are recommended for other low-income renters. These are paid annually, based on income-tax returns, and payable in full only to family units whose income falls below the poverty line. The rate proposed for 1973 was $416 per annum. Administration through the tax system would ensure high take-up rates and lack of stigma whilst ‘by making the payment on an annual basis we suggest that it will be less likely to flow through into increased rents’ [HR, p. 1631. The behavioural assumptions as to how this annual windfall leads to access to improved rental accommodation are not spelt out.

The Report advocates that these tax credits also accrue to low-income renters of public housing, thus allowing Housing Commission rents to be raised towards market levels. This recommendation follows the findings of the national Income Survey that there are a great many people no longer poor occupying the subsidized public housing, while a considerable number of poor people are forced to go without assistance. It also follows from the Report’s belief that ‘assistance must be linked to the


person, and not to the house’ [HR, p. 1641. The Report is at pains to avoid the creation

of Housing Commission ghettos built for poor people only. With income supplements attach- ing to low-income households (tax credits in the case of renters, mortgage interest and council rates deductibility for purchasers) they could choose between private purchase and private and public renting. Housing Commis- sions should purchase existing houses in moderate-income areas and let them to low- income tenants. Such houses would be less identifiable as houses of the poor. The Report advocates the promotion of competition at the low-cost end of the rental market by the Aus- tralian Government offering loans, at the long- term bond rate, to non-profit housing associ- ations. This recommendation would result in an expanded stock of low-cost housing.

The HR suggests that banks and building societies follow the lead of the State Savings Bank of Victoria by including the wife’s earnings as part of ‘family income’ and accepting the family’s undertaking as to her expected working life when they decide on loans. That bank has suffered few losses from this practice [HR, p. 1701. In addition, a means-tested subsidy scheme for house purchase by one- and two-parent low-income families with children is proposed. Borrowers would receive their loan from a savings bank, and would undertake to pay 25 ‘per cent of household income as repayment. Maximum loans are specified under the scheme. A government fund would make good any shortfall between the rate of interest charged on the loan by the savings bank and the 25 per cent of the bousehold income paid by the borrower. As household money income rose over time, borrowers would increase their weeldy repayments, so requiring progressively less subsidy, and eventually they would meet all interest payments and would start to make repayment of principal. ‘Even under conser- vative assumptions of increases in repayments (e.g. 5 per cent per annum) most borrowers would soon be able to meet the whole of their interest charge and will succeed in repaying the principal before the end of 25 years’ [HR, p. 1721. The government fund would guarantee repayment of any amount still outstanding at the end of 25 years.

All of these suggestions for improving the housing conditions of low-income families are

worthy of investigation and experiment. The manner in which annual tax-credit payments would improve the accommodation of private renters requires much more discussion than is given in the HR. The means-tested subsidy scheme provides an unconditional subsidy to house purchasers while household income is low. This is particularly appropriate if those households attracting the subsidy are likely to be on low incomes all their lives. If, however, low household income is but one stage in the family life-cycle, there is much to be said for alternative schemes whereby shortfalls met by government in early years are treated as de- ferred loans, and added to the principal outstanding.

There are seven chapters on the causes of, and responses to, poverty visited on particular groups-rural poverty, families, juveniles, the aged, aboriginals, migrants, people affected by sickness or handicaps. These seven chapters supply a wealth of information and contain 49 recommendations. Space forbids individual review, but there is much that is worthy of careful consideration.

Finally, the Report suggests the setting up of a National Social Research and Policy In- stitute within a Federal government depart- ment. There is a need to continually scrutinize the changing ‘needs of the poor and, indeed, to identify who are the poor. There is also great need for a national body to examine the alternatives and maintain a coherent pattern in our social policy. The Federal Government has since taken steps to establish an indepen- dent Social Welfare Research Centre to be sited at the University of New South Wales.

Conclusion Many of the problems of the GMI scheme

require considerably more attention before a final decision is made-a view which is shared by the authors of the report. Some of these problems, particularly the redistributive issues and the-work incentives question, could be minimized if the simple GMI scheme were replaced by a more complex scheme which embodies the same underlying principles. There is no reason why we need have a single tax rate, and schemes in which the marginal tax rate varies have been proposed by Green 119671 and Perlman [1968], the latter suggest- ing that the disincentive effects could be reduced by making the marginal tax rate a

13x3 POVERTY REPORT: A REVIEW 29

function of hours worked. In Volume 11 of the HR a scheme is considered with the marginal rate rising in steps from 15 per cent to 60 per cent, although it is misleadingly referred to as a progressive negative income tax-the constant tax rate scheme is itself progressive. The scheme is rejected primarily on administrative grounds due to its inequitable treatment of fluctuating incomes and the problems of households with more than one income earner. These problems do not seem to be intractable, and although administrative costs may rise, this would be balanced by fewer problems elsewhere. The HRs rejection of the more complex scheme as it stands lacks conviction. Indeed the OECD noted that

‘, . . one of the attractive features of NIT schemes [is that] it is possible to have a number of [tax] rates applicable to different segments of income . , . not only is this relevant to alleviating work incentives, but also to the redistributive objectives of any NIT’ OECD [1974, p. 271.

The latter point is acknowledged in the proposed scheme by the inclusion of surtax rates on high-income earners. Even if one accepts in principle the philosophy underlying the GMI scheme, the simple form proposed is but one of a vast array of alternatives. We need to see the full array, each scheme embodying different GMI levels and marginal tax rate structures, each involving the same funding requirements, before we can fully assess which scheme is preferable in terms of the criteria discussed above. We may then compare the most preferred GMI scheme with an amended and improved version of the existing system.

In total, the HR makes 119 recommendations. A number of these have, to varying degrees, been adopted and have brought great benefit to poor people. But in this time of fiscal stringency, many of the HR recornmen- dations are unlikely to be adopted in the near future. However, the report is a document whose influence is likely to have a lasting effect. It reaffirms a belief long held within the Australian social security system that help should be concentrated on those most in need. It. makes many well-considered recommendations. We may, in part, measure our social achievements in the future by the extent to which we do institute many of the HR recommendations. Finally, for its Chairman, Pro-

fessor Ronald F. Henderson, it crowns a n achievement stretching from the survey of living conditions in Melbourne in 1966 Wen- derson et d., 19701. Just as Townsend [1954; 19621 in the U K and Harrington [1962] in the USA ‘re-discovered’ poverty in their countries, so Henderson and his colleagues have both measured the degrees of poverty in what appeared to be an affluent and egalitarian country, and have made recommendations for its alleviation. We have much to thank them for.

APPENDIX The following information is provided in

Volume 2, Appendix 6 of the Report on the costs of the minimal and preferred proposed GMI scheme. These costs exclude the self-employed and refer to August 1973.

TABLE A1 Annual Costs of Minimal and Preferred GMI

Schemes

Minimal Preferred Proposal Proposal ($million) ($million) --

Costs: GMI payments:

Categorical Units 2368 2.510 Non-categorical Units 3991 4970

7480 - -

.- 6359

35% proportional tax 8713 40% proportional tax 9958

plus surtax 200 160 8913 10118

less working wives relief 263 3 02 8650 9816

- Revenue:

__.

___ - __

Source: The Henderson Report, Volume 2, Table 6.12.

Thus, since the minimal proposal involves GMI payments to categorical units equal to 100 per cent of the poverty line, whilst the preferred proposal raises these payments to 106 per cent of the poverty line, it follows that a 6 per cent increase in GMI payments to Categorical Units costs $2510m - $2368m = $142m. A 1 per cent in- c r e w thus costs $23.7~11. The minimal proposal involves GMX payments to non-categorical units equal to SO per cent of the poverty line, whilst the preferred proposal raises these payments to


62 per cent of the poverty line (ignoring the slightly higher payments to larger families). Thus, it follows that a 24 per cent increase in GMI payments to non-categorical units costs $497Om - $3991~11 = $979m. A 1 per cent increase thus costs $40-8m.

After allowing for surtax and working-wives relief, the increase in the proportional tax rate by five percentage points from 35 per cent to 40 per cent raises additional revenue equal to $9816m - $86SOm = $1166111. Thus an increase in the proportional tax rate by one percentage point raises an additional $233.2111.

Hence, a 10 per cent increase in all GMI payments costs $64Sm which requires an increase in the proportional tax rate by 2.8 percentage points. A 10 per cent increase in GMI payments to categorical units costs $237111, which requires an increase in the proportional tax rate by 1 . 0 percentage points.

REFERENCES Atkinson, A . B., Poverty in Britain and the

Reform o f Social Securiv (Cambridge Uni- versity Press, 1970);

-, The Tax Credit Scheme and the Redistribu- tion of Income (Institute for Fiscal Studies, London, 1974).

Australian Council of Social Service, Poverty Commissions Guaranteed Minimum Income Proposals-Questions and Issues Raised (ACOSS. 1976).

Barker, D., ‘Negative Income Tax’ in D. Bull (ed.), Family Poverty (Duckworth, London, 1972).

Bentley. P. R., D. J. Collins and D. I. S. Rutledge, ‘Incidence of Australian Taxation: Some Further Results’. Taxation Review Commit- tee, Commissioned Study, No. 6 (AGPS, Canberra, 1975).

Break, G. F., ‘The Incidence and Economic Effects of Taxation’ in The Eocnomics o f Public Finance (The Brookings Institution, Wash- ington, D.C.. 1974).

Brown, C. V. and E. Levin, ‘The ERects of Income Taxation on Overtime: The Results of a National Survey’, Economic Journal (December 1974).

Bryson, L., ‘Poverty Research: Unmasking Noble Terms’, The Australian Financial Review (24 August 1976).

Green, C., Negative Taxes and the Poverty Problem (The Brookings Institution, Wash- ington D.C., 1967). - , ‘Negative Taxes and Monetary Incentives to Work: the Static Theory’, Journal of Human Resources. Vol. 3 (1968).

Harrington. M., The Other America (Pengin, 1962).

Henderson, R. F., ‘The Relief of Poverty: Negative Income Taxes and Other Measures’, Eco- nomic Record, 47 ( 197 1).

- , A. Harcourt and R. I. A. Harper, People in Poverv, A Melbourne Survey (Cheshire, 1970).

Kaim-Caudle, P. R., ‘Poerty in Australia’ (Review Article), Journal of Social Policy, Vol. 5 (1976).

Meade, J. E., ‘Poverty in the Welfare State’, Oxford Economic Papers (November 1972).

National Committee of Inquiry, Compensation and Rehabilitation in Australia, Vok. 1 and 2 (AGPS, Canberra, 1974).

National Superannuation committee of Inquiry, A National Superannuation Scheme for Aus- trulia, Vol. 1 (AGPS, Canberra, 1976).

Organisation for Economic Co-operation and Development, Negative Income Tax: An Approach to the Co-ordinalion of Taxation and Social Welfare Policies (OECD, Paris, 1974).

- , Public Expenditure on Income Main- tenance Programmes (OECD Studies in Resource Allocation, No. 3, Paris, 1976).

Perlman, R., ‘A Negative Income Tax Plan for Maintaining Work Incentives’, Journal o f Human Resources, Vol. 3 (1968).

-, The Economics of Poverty (McGraw- Hill, 1976).

Podder, N. and N. C. Kakwani, ‘Incidence of Indirect Taxes and Company Income Tax’, Taxation Review Committee, Com- missioned Study No. 7 (AGPS, Canberra, 1975).

Priorities Review Staff, Possibilities for Social Welfare in Australia (AGPS, Canberra, 1975).

Rees, A., ‘An Overview of the Labour-Supply Results’, Journal o f Human Resources, No. 2 ( 1974).

Rein, M., ‘Problems in the Definition and Measurement of Poverty’, in P. Townsend (ed.), The Concept of Poverty (Heinemann, 1970).

Rolph, E. R., ‘Controversy Surrounding Negative Income Taxation’, Public Finance, No. 2 I( 1969).

Salmon. J., Resources for Poor Families: An Experimental Income Supplement Scheme, Commission of Inquiry into Poverty Research Report (AGPS, Canberra, 1974).

-, ‘The Family Centre Project: An Ex- periment in Guaranteed Minimum Income and its Implications’, in P. Smith (ed.), Seminar on Guaranteed ’Minimum lncome (ACOSS, 1975).

Saunders, P. G., ‘A Guaranteed Minimurn Income Scheme for Australia? Some Problems’, Australian Journal of Social Issues (August 1976).

Sebel, R., Poverty in Australia: A Merhodo- logical Review (Economic Society of Aus- tralia and New Zealand, NSW Branch, Eco- nomic Monograph No. 350).

Taxation Review Committee, Full Report (AGPS, Canberra, 1975).


Thornson, N. J., ‘Taxation and the Asprey and Treasury Taxation Paper No. 8, Negative Income Mathews Reports’, The Australian Quarterly Tax and Tax Credit Systems (AGPS, Can- (December 1976). berra, 1974b).

Townsend, P., ‘Measuring Poverty’, British Journal w.3 ‘Graduated Work Incentives: An of Sociology (1954). Experiment in Negative Taxation’, American

Economic Review, Papers and Proceedings (1969). -- ., ‘The Meaning of Poverty’, British Journal

- , ‘The Graduated Work Incentive Ex- of Sociology ( 1962). Treasury Taxation Paper No. 4, Personal Income periments: Current Progress’, American

Tax. The Rate Scale (AGPS, Canberra, Economic Review, Papers and Proceedings 1974a). (1971) .

Watts,

poverty and income maintenance policy in australia—a review article

Documents