Bonds not welfare: A new way of assisting dispossessed indigenous people

I would like to offer a radical proposal (somewhat inspired by the thinking of Henry George) on what could be done if Australia’s non-indigenous population were willing  to compensate the Aborigianl and Torress Striat Islander (ATSI) people, in some degree at least, for being dispossessed of their land when Australian was colonised.  I concede at the outset that my proposal presumes a good degree of decision-making skill as regards thinking strategically about long-term possiblities for achieving an improvement in wellbeing and that things could go badly awry if the recipients of the compensation simply used it to finance additctive forms of consumption. However, the kind of policy proposed here might, by giving hope and recognition, be a means towards helping ATSI people take a positive view of the future. I make no claims that what I propose is likely to be politically acceptable as it stands–indeed, it is likely to be rejected by both sides of politicsd for different reasons–but perhaps there may be lessons to draw from it for some kind of policy that may work better than what we presently have.

The basic idea

In essence, the proposal recognizes the rightful ownership of the land by the ATSI people as a whole. However, rather than them being given back the freehold title to all of Australia’s land, with the rest of the population (and ATSI who presently have purchased land of their own, such as the more financially successful living in urban areas) leasing it back from the ATSI people, the ATSI are assigned shares of an income stream derived from the land. These shares—entitlements to flows of income from the land—I propose we call ATSI bonds. ATSI would receive income from their ATSI bonds until they died, but would not be able to bequeath the bonds to anyone, so on their deaths their bonds would be cancelled. However, new bonds would be created for members of new generations of ATSI. The dividend stream for ATSI bonds would be generated by a reform of the public finance system in which marginal income tax rates and spending on ATSI income support were reduced while there was a significant increase in taxation on unimproved land values with what, for want of a better term, I shall label as an ATSI levy. The proceeds from the ATSI levy would then be divided up amongst ATSI according to their eligibility. Earnings on each bond would thus depend upon what happened to revenue from the ATSI levy and on changes in the population of ATSI. If the number of full-ATSI-equivalent member members of the population increased faster than revenue from the ATSI levy, then the average payments to them would be reduced.

The scale of the ATSI levy would not need to be huge. Consider some rough calculations. The median ATSI age is 20 and the ATSI population is about half a million out of about 21 million. So if 250,000 adult ATSI were to be provided with an annual payment of, say, $50,000 (roughly Australia’s per capita income) would cost the rest of the Australian population (20.5m) only about $640 per head per year. Actual costs would be less than this, since income taxes would be reduced and the payments themselves could be treated as part of the recipients’ taxable income. It would be still less if people currently can qualify as ATSI for benefits purposes on a less than full blood basis. Social security and unemployment benefit arrangements might need to be modified to ensure that ATSI with substantial unearned income could not claim benefits, in line with the rest of the population.

The ATSI levy to generate income for the ATSI bonds could be charged simply as a percentage of the current valuation of unimproved land, as used for rates assessment by local authorities. The big political question is what the appropriate levy rate should be. In terms of economic justice, a first approximation might be, say, three per cent, a figure commonly used as a rule of thumb for the normal rate of return to expect after inflation on a safe asset. With the unimproved valuation of a typical quarter acre block of land in a large Australian city often at least $150,000 nowadays, this would imply an annual levy per house of, say $4,500. This would probably be politically unacceptable, not merely because of the cost to property owners but also because it would very likely imply six-figure payments per year to ATSI (if the average land value stood at $150,000 and there were eight million properties, a three per cent ATSI levy would permit 250,000 adult ATSI each to be paid $144,000). A one per cent levy might be about all that would be needed to ensure $50,000 per year per adult ATSI. But the implications of a three per cent levy certainly should give the non-ATSI population pause for thought about the extent of the ATSI grievance in economic terms.

The size of the levy imposed on property owners could be reduced, for a given total ATSI bond income flow, if it were augmented by a slice of any resource rent taxes charged on minerals extracted from underneath the surface of the land.

It may appear that what is being proposed is akin to a glorified form of ‘Sit Down Money’ or dole payments, but the philosophy is entirely different. To be sure, some might decide not to try to look for work if the dividend from being an ATSI were high enough, but this would be no different from the situation of the ‘idle rich’ or those who have retired. However, this flow of income is not demeaning and instead reflects an acknowledgement of rightful entitlement. It can be on a scale to enable ATSI to escape from poverty and make it easier for them to relocate to places where jobs are easier to come by but where costs of living may be higher. Moreover, as I explain later, because the flow of income is based upon an asset, it puts ATSI in a position where they can raise money to improve their qualifications and lifestyles. If they are put in a better position to acquire property of their own, it is likely they will look after it rather than end up living in the midst of what often seems to an outsider to be a version of the Tragedy of the Commons, namely, over-crowded housing that is being trashed.

How entitlements could be worked out

If ATSI bonds are designed to make amends for disappropriation of ATSI from their land by European settlement from 1788 onwards, then ideally in deciding entitlement one would wish to work out a person’s ATSI fraction by studying their family trees right back to the arrival of the First Fleet. Clearly this is impractical. More capable of implementation is the idea that the number of ATSI bonds a person would be granted would depend on the number of ATSI great-great-grandparents they had. Full-blood ATSI would receive 16 ATSI bonds, those with just a single ATSI great-great-grandparent would receive one ATSI bond, and so on. If this were too problematic in terms of proof, then more modest schemes based on a maximum of 8 bonds and great-grandparents, or based on 4 bonds reflecting the number of possible ATSI grandparents. Clearly there could be major administrative problems for establishing a person’s lineage in some cases (in the absence of documentation, could one rely upon family oral history, for example?), but these problems are present in current welfare systems.

Whatever fraction a person is deemed to be an ATSI, there needs to be further rules about the age at which they become eligible to receive earnings from their ATSI bonds, and about whether or not earnings entitlements will be age-related (in the way that income from work and asset accumulation often is) after the initial age threshold has been crossed. If would, of course, be possible to have a system in which ATSI bond entitlements and earnings began at birth, with the earnings stream being paid to the (active) parents until the child turned, say, 18. But such an approach is clearly open to abuse by the parents and could result in a major incentive to have children just to profit from their earnings streams if the flow of income from bonds were much in excess of the costs of rearing children to adulthood.

Two alternative strategies for dealing with the child/adult issue stand out as contenders. One is simply to begin entitlement and pay ATSI bond income from 18 onwards, with children being treated exactly as for non-ATSI families in terms of Family Tax Benefit, etc. The other is to have entitlement beginning at birth but to pay the income from birth to 18 into a trust and invested. At 18, the accumulated capital could be used to buy an annuity, the income from which would supplement the flow of income from the person’s ATSI bonds. Alternatively, the accumulated capital could be turned into units of an investment trust deemed to be owned by the person in question and open for them to sell, along the lines of a conventional investment trust. The second class of strategies clearly requires much more financial sophistication on the part of the ATSI recipients and makes their overall income streams much dependent on the competence of the trustees. It would also require policymakers to decide what to do about taxing trust earnings on income on assets being held up to age 18. While the investment trust units variant would permit newly-adult ATSI to cash in their accumulated assets and get off to a head start financially as adults, rather than having the front-end loading that many young adults face with mortgage and student loan interest charges, this would still be possible with the simple ‘benefits from age 18’ approach, as the next section explains.

A market for ATSI bonds

Some ATSI may wish to sell their bonds in order the raise money to start a business, invest in their education or buy property. They should have the right to do so, with those who purchase the bonds then receiving the income stream from them and being able to on-sell them to others, should they wish to do so. The ability to sell ATI bonds gives ATI from remote areas a much bigger chance of moving to areas with higher living costs and, if they wish to do so, integrating with urban Australian society. However, it must be conceded that it does come at the risk that those who sold their bonds would not use very wisely the proceeds from selling them: some might use the money mainly to finance a catastrophic rate of drug and alcohol abuse.
To enable an ATSI bond market to operate, the bonds would be dated on the basis of the difference between the initial owner’s life expectancy and their age at the time the bond is offered for sale. If the bond is offered to the market for the first time in, say, 2010 by a 26 year-old ATSI male with a life expectancy, say, 59, then it would be recorded as a 2043 ATSI bond, with its stream of income ceasing at the end of 2043. A bond held by a female ATSI of a similar age but a life expectancy of, say, 65, would be recorded as a 2054 ATSI bond. Life expectancy figures used for dating the bonds would vary depending on the person’s age cohort.

In many respects, an ATSI bond, once offered and sold in the open market, would be like any other medium- to long-term government bond with a market value based on the present value of its future earnings, which would fall as interest rates on alternative assets rose, or vice versa. There would, however, be several potential sources of uncertainty about the income stream:

• If the rate of growth of the ATSI population fell (or an existing decline accelerated), the total number of ATSI-held and non-ATSI-held bonds would be smaller than it would have been, and earnings per bond would be higher.
• Rising life expectancy amongst ATSI would reduce the average earnings per bond.
• The earnings stream for ATSI bonds would be affected by changes in land values and, unless enshrined in law, by changes in the percentage rate of ATSI levy on land.
• The earnings stream of ATSI bonds could be affected by an adverse selection problem. Suppose ATSI who judged they had a poor chance of living to anywhere near their life expectancy sold their ATSI bonds, while those who had healthier lifestyles and judged they had a good chance of living well beyond their cohort’s life expectancy did not. If so, and if these guesses were correct, then the average longevity of ATSI who hold on to their bonds will increase while the earnings streams of traded ATSI bonds will run for longer than they would have done if they had not been traded. This would make the number of claims on the earnings pool bigger than it would have been in the absence of adverse selection.

The need to speculate about the these issues is, however, not limited to potential buyers of ATSI bonds: ATSI who potentially have long lives ahead need to work out what is likely to happen to their earnings through time before they reach decisions about whether or not to sell their bonds. This could limit the impact of the adverse selection problem: shrewd ATSI would have a bigger incentive to sell their bonds if they anticipated the impact of adverse selection on the value of earnings per bond for those who continued to hold bonds.

Once a market for ATSI bonds existed, ATSI would be able to use their bonds as collateral with banks if they wished to borrow money to finance education, buy property or other assets, or start a business. This would provide a means for ATSI to raise funds in cases where, for whatever reason, they were reluctant to sell their ATSI bonds in order to do so. This is, ultimately, perhaps the crucial difference compared with current systems of benefits paid on the basis of ethnicity: the current systems provide income but no asset base to use as a means for an ATSI to raise money to improve their position.

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