Thursday, June 2, 2011

The Henry Review reviewed: part 3

The Henry Review was more than a review about Australia's tax system: it was a review about Australia's tax and transfer system, so as well as looking at the money the Government takes in, it also looked at the payments, subsidies and other forms of financial assistance that the Government pays out to individuals.

We'll consider what Henry says about housing transfers – in particular, Rent Assistance and public housing – below.

(Ken Henry contemplates the effective marginal tax rates associated with public housing rent rebate policies)

But first, a final word on what Henry says about tax.

We've noted in the previous two parts of our review that the taxation of income from savings (which, on Henry's definitions, includes property speculation) is a focus of the Henry Review, and in his recommendations Henry develops the theme of treating different means of savings more consistently, particularly by taxing most forms of savings income at a 40 per cent discount to the saver's other income.

As always, the question arises: if you tax savings incomes less heavily than labour incomes, who benefits? Virtually by definition, the wealthy benefit.

Henry gives an indication of just how skewed is this benefit in the preliminary discussion paper to the Review, which shows just how skewed is the distribution of wealth – and hence, the distribution of labour incomes and capital incomes (ie what we've been calling savings incomes: interest, net capital gains, net rent, dividends and trust incomes).

In 2005-06, the bottom 50 per cent of Australian taxpayers received 17.6 per cent of total labour incomes, and 15.8 per cent of total capital incomes. On the other hand, the top 10 percent (keep in mind, this is a much smaller group) received 28 per cent of labour incomes, and 53 per cent of capital incomes.

To really make the point, an even smaller group – the top one per cent of tax payers – received 5.3 per cent of labour incomes, and 28.5 per cent of capital incomes.

In other words, the better off you are, the stronger the mix in your income of capital income to labour income. And Henry would generally tax capital incomes lightly, and labour incomes relatively heavily.

Henry doesn't give a strong justification of of this basic bias in the tax regime he proposes. He does, however, make a suggestion that would go a little way towards mitigating it: a bequest tax. The tax Henry has in mind would apply only to inheritances above a 'substantial threshold', so as to fall on the wealthiest 10 per cent of households, and then apply simply as a low flat rate.

'You mean "death duties"!' gasp the decadent bourgeoisie. That appellation is fine by us here at the Brown Couch, though a bequest tax could probably be even more accurately called an 'unearned wealth tax'.

It should be noted that the Henry Review does not go so far as to positively recommend a bequest tax – it just spells out the benefits of one, then invites a community discussion of the issue. Good luck with that.


On to housing transfers.

First up, Henry gives a strong statement – albeit in the peculiar language of economists – of support for housing assistance:

A key function of national government is the prevention of capability deprivation — that is, the absence of fundamental capabilities that enable people to participate fully in society. Income support is a major mechanism for achieving this end. It provides people with resources to maintain an adequate standard of living and supports their participation in the community, including the workforce.... There is a further need for specific housing assistance in recognition of the special role it plays in supporting wellbeing.
And in similar terms, Henry states his general principle for the provision of housing assistance:

Housing assistance should be provided in a way that is equitable, does minimum harm to participation incentives and gives recipients choice in the housing they occupy.

Now we turn to the actual lie of the land. In Australia, Henry observes, 'there are two major forms of housing assistance available to low-income earners: Rent Assistance and public housing. A person can access only one or the other.'

The implication is that there is a great divide in Australian housing assistance policy. There is, but with respect, Henry doesn't quite define the divide exactly right. Rather than 'public housing' he really ought to have referred to 'social housing', which is a larger category that also includes community housing organisations. True, it's only a slightly larger category: in 2008, there were about 30 000 community housing tenancies, compared with 330 000 public housing tenancies (and, for the record, about 940 000 Rent Assistance recipients). Still, I don't think this is nit-picking, and we'll return to the complicating factor of the community housing organisations further below. Henry notes their existence, but otherwise he refers to public housing.

So how does that general principle of housing assistance go, either side of the great divide?

Rent Assistance
Rent Assistance is paid by Centrelink to recipients of other Centrelink payments (eg Age Pension, Disability Support Pension, Newstart), and recipients of Family Tax Benefit Part A (where paid at more than the base rate), where the recipient pays more than a certain threshold amount of rent. These thresholds vary according to the recipient's household type (ie single or couple, and number of kids). The amount of Rent Assistance paid is 75 cents for every dollar of rent above the threshold, subject to a maximum amount, or cap. These caps also vary according to household type.

Generally speaking, Henry likes Rent Assistance. For Henry, it's equitable, in that it is well-targeted to need (the thresholds rule out about 40 per cent of Centrelink recipients, who pay no or low rents). It's okay in terms of work participation, because the amount paid is independent of the amount of the recipient's other Centrelink payment. This means, for example, that the recipient who does some work and earns a bit of money might have their Newstart payment reduced, but not their Rent Assistance – which is less of a discouragement to working than if both the Newstart and the Rent Assistance were hit at once. It also means that the rate at which income support is withdrawn is the same for renters and owner-occupiers – which is important in terms of equity.

And, in terms of choice, Rent Assistance recipients can choose which houses to apply for, and when to move. Henry also observes that because Rent Assistance works as a 'co-payment' - that is, you and the Government go 25/75 in paying the rent above the threshold amount – there is an incentive for receipients to economise and choose lower cost rental housing (about 30 per cent of Rent Assistance recipients receive less than the maximum amount).

For Henry, the main problem with Rent Assistance is one we've discussed before on the Brown Couch: the amounts at which it's capped are too low. Henry's solution is the same as we discussed: lift the caps. In particular, Henry would set the cap for each of the various household types at the 25th percentile rent for a dwelling of suitable size. (In other words, take all rental dwellings of the same size, rank them according to the amount of rent: the 25th percentile is more expensive than 25 per cent of dwellings, and cheaper than 75 per cent.) And looking ahead, Henry recommends that the caps should rise in line with rents, rather than the CPI, as is currently the case.

As we discussed previously, one possible objection to increasing the maximum amounts of Rent Assistance is that this may cause rents to rise – that is, landlords will simply eat up the increase. Henry doubts this would be a problem, noting that Rent Assistance recipients comprise a minority of the market... and anyway, would it be such a bad thing if the rents paid by Rent Assistance recipients increased? This would be (in economist-speak), 'a market signal to suppliers of rental housing to shift toward provision of the type of housing demanded by Rent Assistance recipients. Suppressing price signals is not conducive to promoting increasing supply over the long term.'

That's how much Henry likes Rent Assistance. What about public housing?

Public housing

Says Henry:

Public housing is a significant mechanism for providing housing to disadvantaged groups. It has become the primary source of housing for people who cannot access appropriate or adequate housing in the private market such as people with a mental illness and Indigenous Australians who still too often face discrimination in the housing market. Social housing (public housing and community housing) provides a valuable stock of houses in the context of Australia's housing supply difficulties, and in some areas such as remote Indigenous communities is the only viable source of housing.

(You can feel a 'however' coming, can't you?)

However, there are a number of areas where social housing is not adequately supporting the Australian households that rely upon it for adequate housing.

Thereinafter, Henry conducts a thorough demolition of the way public housing delivers housing assistance – particularly the way it delivers rebated rents (in most cases, rebated to 25 per cent of household income) to tenants of certain publicly-owned dwellings.

This is, Henry says, inequitable. Public housing rent rebates deliver a much greater level of assistance to public housing tenants than Rent Assistance delivers to tenants of like means in private rental. And within the public housing system, the level of assistance is inequitable because it is the same, regardless of the relative amenity of the particular dwelling with which it comes (that is, person pays the same rent, whether they're in a roomy house by the beach, or a pokey bedsit in the sticks), and regardless of any other costs (transport, etc) that go with that. It is also inequitable because it is the same for those in greatest need (eg those who were previously homeless, those whose health is at risk) as for those who are not but who are on a low income. Rather, public housing differentiates between these levels of need by giving preferential placement to those in greatest need on its waiting list.

Which leads us to work disincentives. The waiting list is the site of a major discouragement to work, because to stay on the list you've got to stay poor. Henry refers to research that reports that rates of unemployment are 11 per cent higher for men, and 5 per cent higher for women, when they are on the public housing waiting list, compared to when they are in public housing.

But when in public housing, these persons face another round of work disincentives. As Henry points out, public housing's income-related rents mean that if you do some work and earn a little money, your rent goes up, while your Centrelink payment goes down. In terms of effective marginal tax rates, public housing's 25-per-cent-of-income-rents straightforwardly add 25 per centage points on top of the effective marginal tax rates ordinarily associated with increasing work and incomes.

This too is something we've discussed on the Brown Couch before, and illustrated in the following charts. Each gives the effective marginal tax rates faced by one of three typical public housing households, based on their Centrelink payments and Family Tax Benefits being withdrawn, and their rent, income tax and Medicare levy being increased, as their income from employment increases. (The data is from 2008, but the general shape of things will be similar today).

(Click on each for a better view)

Our focus then was on the effect of a variation on income-related rents that's peculiar to New South Wales: the moderate income rates, which slide your rent up to 30 per cent of household income and stack on even higher effective marginal tax rates. Henry doesn't mention this particular policy: for him the underlying policy of 25 per cent income-related rents is bad enough.

As for choice: public housing tenants don't really get a choice about their housing. Receipt of a public housing rent rebate is tied to occupation of a public housing dwelling, and they get the dwelling that's offered to them – and they better take it lest they spend even longer on the waiting list or, worse, get kicked off the list. Once in public housing, a person can move around and take their assistance with them, but here too public housing's systems make a mess of persons' choices.

For one thing, public housing authorities place restrictions on moving around (eg you have to be eligible, as if you're on the waiting list). Another thing: because the rent is the same regardless of amenity and location, tenants have, as Henry puts it, 'an incentive to maximise their "in-kind subsidy" — that is, they try to stay in larger and better houses than they would normally occupy if they had to pay directly for their housing.' And public housing landlords lose the benefit of receiving 'effective price signals' about what sort of housing stock tenants would really prefer to occupy, and so labour with a public housing stock that is poorly matched to public housing households.

It is, as I said, a demolition job. There are a couple of points at which Henry probably overdoes it. The fact that unemployment is higher on the waiting list than in public housing may be attributed, as Henry does, to the work disincentive effect of having to maintain eligibility, but you could also make the case that unemployment is lower in public housing because the relative stability and security of the tenure helps get people work-ready and back into employment. (The authors of the research cited by Henry suggest both factors are at work).

Henry also suggests that income-related rents may contribute to 'intergenerational poverty' in public housing, because they assume a contribution from children's incomes. He does not, however, consider that the children of tenants in private rental housing might also make such contributions, and in larger amounts, considering the generally lower level of assistance that Rent Assistance provides. If there's a problem of intergenerational poverty in public housing, it is not so directly the result of including children's incomes in the calculation of income-related rents.

Still, even if you're a committed defender of public housing and income-related rents, Henry's is a critique that you'll have to come to grips with.

So how would Henry cure the ills of public housing? Firstly, with the benefits of Rent Assistance. Henry proposes that public housing tenants should receive Rent Assistance and pay market rents to their public housing landlords:

As recipients of social housing would receive Rent Assistance, the amount they pay to their landlord should reflect the market rent of a dwelling. A dwelling's rent reflects the range of benefits it provides, such as the building's size and quality and the location's proximity to employment, services or nearby amenities. Charging market rents would allow recipients to make trade-offs between these aspects of housing and other elements of their consumption. It would also provide signals to social housing providers about the housing that is valued by their clients. In combination, Rent Assistance based on market rents should encourage the provision of social housing that is of value to tenants.

Henry allows a couple of qualifications on this. First, there would have to be 'carefully targeted transition arrangements, to prevent households from being forced into housing stress or pulling up roots and moving away from support networks. Secondly, there are some locations – particularly remote Indigenous communities – where there really is no housing 'market' and hence no 'market rents', and yet other locations – particularly mining towns – where even a reformed Rent Assistance (ie with higher caps) won't get low-income households anywhere near an affordable rent. In these locations, some limiting of public housing rents with reference to tenant incomes would be okay.

Secondly, in respect of 'high needs' clients, Henry recommends that there should be a new additional payment, made by the Commonwealth Government, reflecting the higher costs of housing such persons, which would go to their public housing landlord – or indeed, if they were to move, to another social housing landlord. (Henry specifies 'social housing', because that's where so many of the 'high needs' tenants are, but expressly leaves open the prospect of the additional payment being made available to private landlords.)

You'll notice that the term 'social housing', as distinct from 'public housing', has crept into the account; it does so in the Henry Review's recommendations, too. Let's turn briefly now to those other social housing landlords, the community housing organisations, and the way they complicate the picture of housing assistance in Australia.

Community housing

Let's be clear: the way it currently works places community housing, in very large part, on the same side as public housing in the great housing assistance divide. Most community housing tenants pay income-related rents, at a rate of 25 per cent of their household income, on very similar terms to public housing tenants, with all the implications for inequity, work disincentives and interference with choice that go with that.

However, by a peculiar dispensation of the Government, community housing tenants do receive Rent Assistance. They do so, however, on terms that avail them of none of the benefits that Henry identifies in Rent Assistance.

Here's how Rent Assistance works in community housing. The community housing organisation effectively says to a tenant: we do income-related rents, so give us 25 per cent of your income, not including Rent Assistance. Now, if that was your rent, you'd get so much Rent Assistance (according to Centrelink's usual thresholds). Let's count that Rent Assistance as income for our income-related rent purposes. This additional income means the rent will go up (by a small amount), and as your rent has gone up, so has your entitlement to Rent Assistance (by an even smaller amount). Repeat until the increasingly tiny increases approach their mathematical limit. Now give us all of the Rent Assistance.'*

So, the community housing organisation maximises and captures all of the tenant's Rent Assistance. The tenant has no incentive (or opportunity) to economise on their housing costs, and the community housing landlord receives no 'market signals' about their housing stock. Rent Assistance is becomes just another an operating subsidy to community housing orgainsation, albeit one that is directed through the bank ccounts of individual tenants, who bears all the risks associated with making sure Centrelink pays it in the amount expected by their landlord.

That's not the only potential problem with this odd arrangement. Community housing is the only growing part of the social housing sector, and this growth is increasingly being achieved through private financing – particularly debt financing. Community housing organisations are relying on those Rent Assistance payments to pay mortgages.

And they're involved in other financial innovations, too, such as the National Rental Affordability Scheme, which has created partnerships between community housing organisations and private investors that are supposed to turn a profit, within the strictures of a requirement that tenants pay not more than 80 per cent of the market rent. This too, raises questions about revenues, rent setting and housing assistance.

All of this is to say that housing assistance policy as we know it is under challenge on a number of fronts. The Henry Review indicates a number of them:
  • efficacy – in particular, Rent Assistance as it is currently capped is often not effective in producing affordability;
  • equity – in particular, income-related rents in social housing deliver to similar persons a higher level of assistance than Rent Assistance, and without regard to differences in need or the amenity of the dwelling also provided;
  • work participation – in particular, the waiting list for social housing creates a work disincentive, and so do income-related rents and the high effective marginal tax rates to which they contribute.
And we've identified another: the financing of social housing – in particular, the new private debt and equity arrangements into which community housing organisations are getting, and the implications of these for reveues, rent setting and housing assistance.

These four fronts of pressure will change the shape of housing assistance policy. Henry's own vision of the new shape is an enhanced Rent Assistance, extended to social housing tenants, and supplemented by a new housing payment for persons with high needs. What do tenants and their advocates in the community sector think?

Next: a summing up of the Henry Review, and the Government's response.


* For the mathematically inclined, this iterative process can be reduced to a fairly simple formula.

RC = 4TC-3LT

RC is rent charged to the tenant - that is, what they are actually expected to pay;
TC is the 'tenant's contribution' - that is, 25 per cent of the tenant's household income, excluding Rent Assistance;
LT is the lower Rent Assistance threshold.

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