At present, most forms of government assistance for low income households takes the form of some type of income-contingent subsidy. This is true for rent assistance, vouchers or public housing. The problem is that once you accept this form of welfare, a trap is created in that if your income rises you could be taxed effectively up to a 100 percent marginal tax rate. Not surprisingly, this reduces incentives to increase income creating poverty traps. The problem is that, while such assistance makes some sense for the long-term empoverished, it is potentially a concern for households that find themselves in short-term housing stress. This could be because of a temporary loss of income due to unemployment, job search or illness in the family, need to moves cities for work, or a rise in rents or interest of home mortgages. It is terribly costly if these households (assuming that they can do so in a timely manner) enter the welfare system and never exit due to the poverty trap.

In response to this, how about governments offer a 'housing lifeline.' This would be a government line of credit that could be accessed by any household at their discretion. If accessed, the government would pay the household's landlord or lender as the case may be. But here is the twist: the assistance is a loan, not a handout. When incomes rise, you have to pay it back.

But how do you get people to pay off the debt. InAustralia, college students pay off school fees after they graduate. When their income rises, they have to pay back their loans to the government. While this is effectively an increase in the marginal tax rate, it is a relatively modest one: certainly no real deterrance to continuing a career path.

Similarly, a housing lifeline could be paid back through the tax system. That is natural as that is the way we monitor incomes anyhow. So unless you want to drop into the black economy altogether you'll pay back. Moreover, if it turns out your income is really high, the government can penalise you. That way only the truely needed will take out the life line.

In the end, this will: (i) cost the government little -- it is a debt rather than a handout; (ii) save the government some money by reducing the long-term welfare base; (iii) allow households to avoid the stigma associated with entering the welfare system; (iv) empower households into the management of their own circumstances; and (v) make it more attractive for landlords and banks to deal with low income households (they are partially insured by the scheme).

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