Here’s how to fix poverty without taxing the rest of us more

Those who keep an eye on the ever-rotating carousel of policy theme weeks will be aware we’ve hit Anti-Poverty Week, capped off by the UN’s Day for the Eradication of Poverty.

No doubt activists across the country marked these important events with a hearty three cheers for capitalism – the single greatest invention for reducing poverty in the history of mankind.

Just kidding. The activist message is overwhelmingly on the need for government to spend more and tax more.

For example, the Anti-Poverty Week website calls for an increase in welfare payments, stronger protections for renters, a massive increase in social housing and cuts to negativegearing and capital gains tax concessions.

In other words, many activists believe poverty is the fault of markets and the only solution is government.

This is just one of many contestable assumptions pervading the debate.

Another important assumption is the very definition of poverty itself. Activists define poverty as the number of people whose income is less than a certain percentage of average wages. This definition is almost ubiquitous in debate;hence news stories this week that 1 in 7 people are living in poverty.

However relative measures like this do not give a completemeasure of those in poverty — at least not if you consider poverty in terms of what you can and can’t afford.

Unfortunately, few attempts have been made recently to measure incomes against objective standards of poverty in Australia.

International evidence suggests that, when measured against objective standards, poverty is substantially lower than relative measures suggest. It also indicates poverty is falling.

For example, an analysis from Columbia University found that in the US, relative poverty has been slowly but steadily increasing over time, while absolute measures show a significantly larger fall over the same period.

This is more than just a matter of duelling statistics: what is being measured matters. Relative poverty measures place greater emphasis on inequality, while absolute measures focus on material deprivation.

Hence, many poverty advocates seem to focus almost as much on measures designed to reduce income and wealth at the top end as they do on boosting incomes at the bottom.

At its most extreme, you see proposals like a universal basic income. At its core, UBI is about flattening out inequality at income levels between welfare recipients and those on average wages.

This is because the primary beneficiaries of almost every UBI proposal are those currently not receiving welfare benefits.

For those on welfare, a UBI will at best top up their welfare to a slightly higher lever or leave it unchanged. Some proposals see welfare benefits cut to pay for a UBI.

Yet for those who don’t receive welfare — primarily those who have opted out of the labour market or whose incomes are too high to qualify — the UBI is a straight gain.

For those earning below average wages, the gain from UBI may well outstrip the taxes raised to pay for it. For others it would not.

But most of these people are not in poverty; at least not as we would normally view it. And providing even a modest level of support to this cohort would cost a very large amount of money — potentially a hundred billion dollars or more even according to basic income advocates.

There is a bigger picture question here too. Do we actually want government to take increasingly intrusive and expensive measures to flatten out inequality? Or should we instead focus on maximising opportunity, both to raise people out of poverty directly and to fund a robust safety net for those who fall out of the system?

If the latter was your aim, and your focus was on reducing the number of people and families who do not have the basics, you would see better results by targeting assistance directly to them.

It is important to note that this is not about the ‘deserving’ vs ‘undeserving’ poor, as it is sometimes portrayed. This is solely a matter of maximising the impact on poverty for taxpayers money.

The fact is, the more tightly assistance is targeted at those in need, the lower the overall cost to the taxpayers, and correspondingly the greater efficiency (in terms of reducing poverty) you see for every dollar spent.

This targeting is one of the strengths of the Australian welfare system. It is not without its own issues, not the least the problems with high effective marginal tax rates created by the interaction of family income based welfare payments with the individual structure of the tax system.

Indeed, one of the potentially valuable uses of big data and the AI revolution is the ability to target support and assistance at an even more granular level. Here are just three examples.

First, costs of living vary significantly across the country. Those living in larger cities, especially those living in Sydney or Melbourne, face higher costs than those living in other areas — most notably housing costs.

So allowing unemployment benefits to vary based on the cost of living in your community may allow for greater support for those facing these higher cost burdens.

While making these adjustments manually would be too costly and time consuming, automation may make this possible.

Second, automation may also alleviate some of the compliance burdens faced by welfare recipients. AI tools could allow for easy reporting and capture of changes in circumstances in real time rather than requiring recipients to do it themselves.

And third, we could even see a day where AI modelling could tailor specific supports to individual unemployed people that would target the intersection between structural and personal factors driving unemployment.

Unfortunately, for many people, innovation in welfareimmediately makes them think of things like Robodebt.

As for the activists, they are not nearly as interested in getting value for taxpayers’ dollars as they are in just getting their hands of a lot more of them.

Simon Cowan is Research Director at the Centre for Independent Studies

Photo by Guduru Ajay Bhargav