Comprehensive Income Measures, Housing Equity, and Tax‐Transfer Effects

Paul Flatau and Gavin A. Wood

Australian Economic Papers, 2000, vol. 39, issue 3, 327-346

Abstract: Cash income is widely recognised as a deficient measure of income, as it takes no account of the contribution of net worth to consumption potential. Housing equity is a particularly important component of net worth. Comprehensive income measures incorporate housing equity by adding its annuitized value to cash income. However, such an approach fails to take into account adverse tax‐transfer effects on conversion of housing equity. As such, the contribution of housing equity to potential consumption is significantly exaggerated. A net comprehensive income measure, which directly incorporates the tax‐transfer effects from housing equity conversion, is introduced. Simulation exercises are conducted, to demonstrate the importance of taking into account tax‐transfer effects when measuring the comprehensive income of those homeowner income units in receipt of government pensions and benefits.

Date: 2000
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