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76 responses to “The politics of the top income tax rate”

  1. Chris

    As someone firmly on the “left” side of the argument, I do wonder whether there would be any circumstances under whether I would feel that a cut in the top rate of income tax could be justified.

    Can I ask if you have similar views over the threshold at which the top rate cuts in as well? My view is that all tax thresholds should be indexed to at least the inflation rate, if not average weekly earnings, rather than “giving” it back to us as a tax cut every few years when really its just putting things back how they were.

    I ask because it does have similar implications – why give those better off a tax break when others need the money more?

  2. Fran Barlow

    I’ve always thought there should be a completely progressive incremental scale, so that each extra dollar of earned income was taxed very marginally more than the dollar before it, until such time as the top marginal rate was reached. That way, we’d have a very large number of ‘threshholds’. The tax rate would be a smooth curve.

    At the very top end, I’d claw back income by progressively reducing the deductibility of remuneration packages from corporate income. This threshhold would cut in at about 25 times the average income of all full time employees/contractors in the company or perhaps 10 times the income of the top half of income earners in the company.

  3. John D

    I remember paying a marginal tax rate of 60% in the seventies while working as a not very senior engineer. As far as I could see it was not stopping anyone I knew from working hard since anyone worth having was working for things like the thrill of achievement rather than money as such. There were also no signs that worthwhile investments were not being made because of a lack of capital. Sure, the the rich ranted about tax rates and motivation with out any of them dropping out of the chase for more money.
    The other funny thing is that Scandinavia has been very economically successful for a very long time despite lots of welfare and high taxes to pay for them. I read somewhere that what really started Sweden on the road to success was rising health levels. The high level of literacy in the 19th century might have helped too. (Driven by the obsession of the Lutherans to have everyone able to read the bible themselves instead of getting it second hand from priests.)
    What really needs to happen is for governments to be more inclined to decide what needs to be done and set tax rates accordingly rather than what we re doing here at the moment.

  4. Pet

    The top tax rate debate in the UK seems to be a Laffer curve debate. The argument goes that a top tax rate of 50% earns the same or less than 45% because of avoidance – transferring income to trusts, living on the Isle of Mann etc. So the Torys frame the question ‘if a 50% tax rate doesn’t take in more money, why are we doing it?”. Or dropping the top tax rate is a cheap way of providing extra incentives to entrepreneurial types. I don’t buy the arguments but there is theoretically some top tax rate that becomes just punitive and doesn’t raise more revenue. Is 50% + national insurance contributions and vat at that point? I doubt it and effort could be better spent closing the loop holes that allow avodance.

  5. Guy

    Chris @1, I would tend to agree on the tax brackets. These should surely be indexed to inflation. The fact that they are not just leads to political hucksterism as you allude to.

    While it is true that doing this would mean that tax brackets creep upwards with inflation, I think this is on balance a fairer outcome. You could argue that the money used to fund this could be used for other purposes as well, but I think at some point you have to dip your lid towards maintaining a certain balance in the tax system.

    Pet @4 – you’re absolutely right on loopholes – as we all know, people on the higher tax rates have accountants that find ways around paying the top rate of tax anyway. Of course, the Cameron Government (and for that matter, arguably every recent government I can think of) hasn’t the guts to close the loopholes and make people pay the level of tax that they are actually supposed to be paying. That would be REAL reform.

  6. Salient Green

    In the US, most of the income of the 1% is from capital gains and dividends and the tax rate for those was down to 15% in 2007 thanks to the Bush tax cuts.

    The top marginal tax rate of 35% is applied over $372,000 but the effective tax rate paid by the top 400 income earners was only 20% due to the large percentage of their income coming from capital gains and dividends taxed at only 15%.

    How this applies to UK I don’t know.

    What I do know is that it is the power concentrated in the hands of the 1% which we should be concerned about, the power to continue doing what they want to do which is counter to the best outcomes of the rest of us.

  7. calyptorhynchus

    Since when has any high income-earner ever used personal income to finance entrepreneurial activities?

  8. Centre Leftie

    Berkeley Economics Professor Brad Delong’s blog has recently linked to some research suggesting that the reduced incentive effects of higher top marginal rates are quite small and that tax manipulation effects don’t actually start to reduce revenue until rates are very high.

    See:
    http://delong.typepad.com/sdj/2012/03/yes-there-is-no-good-reason-not-to-raise-marginal-tax-rates-from-their-current-values.html
    http://delong.typepad.com/sdj/2012/03/supply-side-effects-are-small.html

  9. Centre Leftie

    Forgot to add that the right hand side bar on his blog discusses an argument that the top rate should be 70%.

  10. Aidan

    Though not directly relevant, I would encourage those who are interested to check out the Gruen Lecture by Andrew Oswald.

    http://rse.anu.edu.au/news_events/gruen_lectures.php

    There is audio and slides you can follow along to. Very interesting approach to trying to understand/model human herd behaviour.

    One of the examples he uses in his talk is a study where knowledge of relative remuneration caused a significant net reduction in happiness. Those who were paid less were more unhappy, those paid more had virtually no change in happiness.

  11. Sam

    Fran @ 2

    Germany has a smooth curve incremental rate. Their tax schedule is, literally, a quadratic equation.

    Of course, this in itself doesn’t guarantee much progressivity. You can have a quadratic function that is nearly flat.

  12. Helen

    Chris @1 – it always amazes me that cutoff points and thresholds in fiscal policy / transfer payments / etc can’t be adjusted annually to allow for inflation. In this digital age the effort involved should be negligible. But what do I know.

  13. Martin B

    Seems an appropriate place for one of my favourite quotes:

    “We can safely abandon the doctrine of the eighties, namely that the rich were not working because they had too little money, the poor because they had too much.” – John Kenneth Galbraith

  14. Chris

    Helen @ 10 – I don’t think its because it can’t be done, its because politicians don’t want to do it. Because they want to give it to us every few years as a tax cut just before an election.

    With indexed tax thresholds I would see tax cuts as being very rare events and would have a much higher justification threshold than currently happens. At the moment its quite unclear when a tax cut is proposed as to what is just inflation adjustment and what is really a reduction in taxes.

    One argument I’ve heard against indexation which may have some merit is that it is incredibly hard for governments to argue for a tax increase. And sometimes this is necessary. Without indexation they automatically get a tax increase each year which makes life a lot easier for them. I’d still prefer indexation 🙂

    Fran @ 2 – yea we have computers these days. Its just not that hard.

    One thing I would love to see is modelling of effective tax rates that takes into account the income from both salary and welfare like payments. Eg graphs for various scenarios such as single, single with dependent child under 5, couple with child, couple with child with private health insurance etc… where they plot gross income vs net income (which includes rebates/subsidies etc). Could do another based on typical spending patterns which takes into account GST too.

    I think it would make it easier to see where there are inconsistencies that should be fixed up and who should probably be paying less/more tax. Just looking at income tax rates is quite misleading.

  15. wilful

    Wow and I thought it was entirely my own little idea that we should have some sigmoid function for tax rates…

    I am far more concerned about loopholes, unnecessary complexity and overly generous deductions than I am about the top tax rate. I’d prefer to see people pay their headline fair share in the first place before I would be interested in a debate on raising the top rate.

    Though I think it could and should go up a little bit I’m not interested in seeing the whinging real aussie battlers (family income $250k) on the front of the australian every day… It’s not worth the political pain.

  16. Fran Barlow

    On the Laffer Effect questions, it’s worth recalling that the US from the 1930s to the 1980s had a top marginal tax rate that varied between about 70% and 92%. Oddly, this didn’t bring about the end of US capitalism, nor was put or sustained by those in favour of ‘class warfare’, and the 1950s and early 1960s when the rate was near the peak, was seen widely as something of a golden age.

    The sharp drift downwards in top marginal rates that began around 1981 was accompanied by stagnation and decline in the real wages of the mass of semi-skilled and unskilled workers, a declining manufacturing base and a massive increase in the differentials between average earnings and people on the highest incomes. As late as 1971 the multiple between average CEO remuneration and the average income earner was a mere 25. In the run up to the GFC this had blown out to (depending on which studies you look at) between 300 and 500. One would be hard pressed to show that any substantial public or even private benefit in the US had flowed from these developments outside the top 5% of the populace. There’s simply no evidence that US companies have become better operated in any of the usual senses.

    I read several years ago that one attempt to model the relationship between tax takes at various marginal rates and it showed that for every dollar waived in tax collection by reducing marginal rates, perhaps 16 cents was returned in increased earnings — which figure, if it is correct — would seem to refute the Reagan-era supply-side claims.

    As to the broader question of tax rates, it seems to me that while services that comparatively privileged people (like me) take as foundational (quality health, housing, education and transport) are not available to the bottom 40% the case against tax relief for higher income earners is compelling. When the top income earners are earning multiples of AFTWE of 247 — eg. the head of NAB, it’s hard to fathom how anyone will dare appeal on their behalf.

  17. Sam Bauers

    We could just not have income tax at all. The government doesn’t need income tax receipts in order to function.

  18. Nick Caldwell

    It provides the struggling Labour Opposition with a stonking great club with which it can beat the Conservatives and condemn them as being out of touch.

    From what I can tell, modern Labour couldn’t convincingly muster up a half-hearted condemnation of mass puppy executions, let alone a cut to the top tax rate. Sigh.

  19. John D

    The problem with the rich is that most of them will save the bulk of extra money they get in their pockets whether this comes from tax savings, wage cuts etc. This is not a problem when there are plenty of productive investments available that can use these savings. If there is a shortage of productive investments those nice financial engineers will find cunning ways of “investing” these surplus savings in incomprehensible “financial products” that have a nasty habit of going broke when bubbles burst. In the worst cases the end result are crisis like the GFC.

    The poor are often criticized for spending all their money on goods and services instead of saving. Funny thing is that it is people spending money that create the markets that create the opportunity for productive investment. The reality is that we can’t afford NOT to tax the rich harder and increase the real earnings of the poor.

  20. wilful

    (I know, I know, don’t feed the troll, but…)

    We could just not have income tax at all. The government doesn’t need income tax receipts in order to function.

    Of course there are alternative ways of funding the essential services of government, but generally speaking there’s been an acceptance that income taxes work fairly well. What other ways would you suggest, sam?

  21. Fran Barlow

    We could just not have income tax at all. The government doesn’t need income tax receipts in order to function.

    I’m not convinced that this is true — of course, it is usually the proponents of ‘minimal’ government who take this view so buried in this claim is another about what services need to be provided/underpinned by government. We could argue about what ‘function’ means. A patient in a coma needs very little beyond a life-support system to ‘function’ but most people don’t regard that as functioning in the normal sense. A government-in-name-only may nominally ‘function’ but if its capacity to provide services is more theoretical or symbolic than manifest …

    Yet even putting such questions aside, there is a compelling case for a government ensuring that there are not great differences, in practice, in the life chances of the most and least privileged in the population it ostensibly serves. Income tax and the associated transfers would be one element of that.

  22. billie

    Like John D, I can remember paying 60% marginal tax rate in the 1980s when I entered the bottom of the top quintile of wage earners, sadly my income has slipped. I find it laughable that our top tax rate is 33% a marginal rate that middle income earners used to pay.

    In 1950 only the top income earners in Australia paid tax. Factory workers generally earned below the tax threshhold. ie tax was collected from a third of income earners.

    About 20 years ago a friend and I, at the bottom of the top income quintile calculated that we would were better off living in Sweden with its higher tax regime because we paid seperately for our health insurance, saved extra for our old age.

    Do like Fran’s analysis if US Laffer Curves, higher taxation of high incomes leads to higher real wages for majority of population.

    As I have often said about the UK, London is a great place to be FROM. I can’t imagine what it would be like to be ruled by such entitled gits.

  23. Chris

    Billie @ 22 -the top tax rate isn’t 33% – it’s 46.5% when you include the Medicare levy

  24. pet

    So, this argument in regards to the current UK budget is here:
    http://www.hmrc.gov.uk/budget2012/excheq-income-tax-2042.htm

    Can top earners shift their earnings? when Labour introduced the 50% tax rate £18B of income was brought forward in 2009-10 prior to its introduction. It’s hard to judge the result of the tax because of this and ideally a few more years would have made it more effective but the UK treasury include 0 (and negative values) in their estimate of the range of money brought in by the tax.

    There are other ways to tax- The budget collects more tax off the rich primarily through a mansion tax 7% stamp duty on houses over £2million and 15% if bought by a company. The argument being these taxes can’t be avoided as easily as income tax and aren’t as distortionary (but if you’re rich and not buy a house and were paying tax you’re much better off). they are also closing off some open ended deductions against income.

    So I’m playing devil’s advocate here but why not replace an ineffective distortionary tax with an effective, progressive, less-distortionary tax?

  25. zorronsky

    In my first year at work I paid tax..forget how much ..net. 3 pounds 15 shillings and 9 pence, paid 3:10:0 board and went to the pictures on Saturday night with the balance. Luckily I could pedal to work.

  26. Labouring the Point

    A progressive income tax system where you have a number of tax rates is far too easy for high income earners to avoid.

    My favourite is the same as Milton Friedman. Simply put in a linear tax which is a flat tax but with a threshold which makes it progressive.

    It has NO deductions.

  27. Hal9000

    The whole marginal tax rate argument got going during the 70s when inflation propelled a whole lot of taxpayers into the high marginal rates. Typically, high marginal tax rates were for the first time applied to penalty rate hours’ wages for skilled workers in higher wage industries. This was viewed by many, assisted in such views by what passed for the commentariat and conservative politicians, as unjust and an assault on the whole point of doing those extra hours. The many improved services that this extra tax paid for were ignored (e.g. electrification and unification of the Brisbane suburban rail system) or portrayed as wasteful (e.g. RED scheme).

  28. John D

    The problem with a flat tax with a high threshold is that, if anything, it encourages income splitting as a form of tax avoidance.
    One alternative is a flat tax with a low threshold combined with a flat payment to at least all adults. There is less scope for cheating and it provides a mechanism for increasing the real income for those who are at the bottom of the pile. The only problem is that the winners will be better off unless the tax is set at the current top tax rate and/or the lurks for the rich disappear at the same time. Middle income earners are likely to be the losers.

  29. Chris

    John D – there is already quite a strong incentive to income split to minimise the amount of tax paid and we have strange inconsistencies where families on the same gross income working the same number of total hours can pay quite different amounts of tax.

    And if the government keeps using $150k-160k as the magic threshold in order to qualify for various benefits (often with a strict cut-off rather than ramped) then there will be an unusually large number of families with incomes below the threshold and few just above.

  30. TerjeP

    Most of you know which side of the political equation I come from on this topic so I’ll try and be selective in my comment and avoid stirring up a war on multiple fronts.

    Firstly to taxes on the super rich. And an income of €1,000,000 per year does mark you as being very wealthy.

    In France, the Socialist presidential candidate François Hollande has proposed a bold tax rate of 75% on personal income earned over €1,000,000 per year.

    On a purely pragmatic political basis I’d rather have the left fascinate themselves with these sort of initiatives rather than picking on the merely upper middle class professional workers and small business operators with punitive taxes. However on a pragmatic fiscal basis what is the point of such a tax? People on those sort of incomes are so few that the revenue benefits of such a tax are negligible and the punitive rate is merely a divisive implement to appease others sense of envy.

    In terms of the general notion of progressive income based on national median incomes and the like I think this is antiquated in a world of global labour markets. Which is especially the case at the top end. I recall some years ago looking at tax rates for some African nations where the top tax rate, which was quite punitive, cut in at an annual income of A$9000. In terms of their local population that was a high income. In terms of whether I, or somebody with similar skills and options, would consider taking my capital and moving there to start a business it was a completely ridiculous proposition.

    In the same vein look at the comparable tax rates, after currency conversion, between NZ and Australia. Those in lower income groups in New Zealand would be better off, in income tax terms, moving to Australia even if there gross income remained the same. And surprise, surprise a large number of them do. Whilst this is not a case of the top tax rate being the problem it does make the point is merely down to accidents of history regarding the placement of borders. A high income in Hobart might not be so high in Sydney, but in Hobart it might go a bit further in terms of housing and the like.

    Where I think the left is really missing the party is that they nearly never argue for lower taxes for middle and lower income people. Yet they are much more vocal in asking the rich to pay more tax. Why? Is it because they are more interested in a large state sector than in the welfare and autonomy of middle and low income people? Why don’t we hear more vocal calls from the left for increases in the tax free threshold? I for one would support such calls. We could fight about the tax rate for the super rich another day but in the interim have a unity ticket on something that would actually make a material difference to a lot of people.

  31. wilful

    Where I think the left is really missing the party is that they nearly never argue for lower taxes for middle and lower income people.

    Not entirely convinced you’ve been listening very hard. And I don’t particularly identify as either left or right. But let it be plainly said, I want lower taxes on the poor.

    I don’t see that the total tax rate should go either way in Aus at the moment. If you added up all of my wishlist of expenditure changes I suspect you’d see a small drop in government expenditures.

  32. Fran Barlow

    However on a pragmatic fiscal basis what is the point of {…} a tax {on the super rich}? People on those sort of incomes are so few that the revenue benefits of such a tax are negligible and the punitive rate is merely a divisive implement to appease others sense of envy.

    Hmm … One person’s envy is another’s idea of distributive justice and community. As noted above, for me, it would not merely be the super-rich, but the highly privileged who would pay a lot more. A person on more than $100,000 per annum is highly privileged, IMO. I’d prefer the rate to reflect not money incomes but multiples of the average income in the lowest two quintiles. Once you are earning triple what they get you are beginning to qualify as very privileged.

    Why don’t we hear more vocal calls from the left for increases in the tax free threshold? I for one would support such calls.

    The CEF package involved, I believe a move toward tripling the tax-free threshhold, though that of course isn’t much use to anyone earning less than the existing one, or not much more. It would be better to keep the threshholds and simply give them non-taxable rebates or non/semi-liquid-benefits — like concessional housing, free/cheap dental care, free transport (poor people often end up getting fined and once they can’t pay the incentive is to keep accumulating the fines on the ‘hung for a sheep’ principle), free post-school education etc … or perhaps allowing them to earn more before losing welfare benefits.

  33. faustusnotes

    Terjep, do you really believe that poor people move to Australia because the income tax is lower?

    Also, I bet you a groat that there is another country in the world with lower tax rates for someone on your income. Why haven’t you moved there already?

  34. Chris

    One thing that is lost in just concentrating just on taxing income is that high income does not necessarily mean rich, and low income does not necessarily mean poor. With sufficient assets you can be quite well off slowly selling them down even if they do not produce much income. And generating income through assets it is easier to avoid income tax than your PAYE worker.

    Should we be looking at net assets based taxes? At least for those which are difficult or impossible to move overseas (eg land/housing would be one example).

    Also income tax rates do not in general take into account the number of dependents you may have. A single person on $100,000 is vastly better off than another person on the same salary but with a partner and a couple of kids.

  35. Fran Barlow

    Terje P {style note}

    Most of you know which side of the political equation I come from

    You don’t come from any side of any “equation”. You probably meant to say something like:

    Most of you will anticipate my perspective on this question

    or perhaps

    Most of you know which side of the tax question I’m going to argue …

    Equation used as you have above is a pretentious yet vacuous cliché that recalls indolent journalese.

  36. Sam

    Terje, why aren’t you living and working in Hong Kong, where the salaries are higher and the income tax is much, much lower?

  37. Chris

    Sam @ 36 – I have friends who did that sort of thing after finishing their university degree. Moved to Singapore and Hong Kong to work and save up a bunch of money with the plan to move back to Australia when they have kids and they reach school age. Being able to hire maids makes the whole children plus career thing a whole lot easier too. They come back to Australia for holidays and to buy up real estate…..

  38. Sam

    Chris,

    I also know people who have done this. But very few people are able to or want to move to Singapore or Hong Kong. Here are a few reasons why:

    1. These are horrible places to live
    2. People have ties to their home country which stops them from going (ageing parents, whatever)
    3. Not everyone can get a job in these places.
    4. With dual career couples, even if one can get a job, often the other can’t.
    5. If they have school age kids, they want them educated here.

    The idea that we should have Hong Kong tax rates because a handful of people can go there, is a joke.

    Terje himself lives, works and pays taxes in Australia . Now, why is that? Any or all of reasons 1-5, I would suggest.

  39. Katz

    Wrong TerjeP.

    You speak as if Teh Left (that well known monolithic hivemind) believes that taxation is an end in itself. This is an egregious error.

    Au contraire, generally speaking leftists support taxation in order to cover expenditure. Leftists argue that advanced, complex societies have expensive needs which someone has to pay for.

    Remarkably, with marginal differences, rightists agree. When rightist governments take power, after huffing and puffing a lot, the end up sacking a few tea ladies. They talk the talk about reeling back government expenditure but seldom walk the walk. Instead of taxing, however, these rightists follow Reaganomics into huge deficits. These deficits arise from tax breaks for corporations and high income earners.

    Yet, as every schoolboy should recognise, deficits can become unsustainable. It is clear, therefore, that voters’ demands of government are inflexible. Someone must pay for these services. Corporations and the earners of higher incomes are best able to afford to pay higher tax.

    And TerjeP, as others have noticed, the Australian tax system has given you every incentive to emigrate. Yet you wallow in economically irrational inertia. What gives, dude?

  40. John D

    Chris @29 About 10 yrs ago I worked out the range of average tax a couple averaging a total of $50,000/yr over 5 yrs would pay. It ranged from about 16 to 42% depending on how evenly the income was spread between the partners and over time. A fair system would give the same average no matter what the distributions were.
    What I suggested @28 has this fairness. (However, it is not the only way to achieve it.) It would help too if company and individual earnings were treated in the same way.

  41. Chris

    Sam @ 38 – agreed. Except for point 1. Culture shock aside, they can be great places to live if you’re on a good income (which many expats would be).

    John D @ 40 – or you just explicitly allow income splitting which removes the incentive for family trusts which the wealthy use.

    Katz said:

    Corporations and the earners of higher incomes are best able to afford to pay higher tax.

    Really? Compare say someone sitting on $1 million of assets (not unusual for retirees these days especially when you take into account the family home) against someone who has $0 assets but is earning $100,000 with a few family dependents. I’d say the former is actually in a better position to pay tax, but often on that sort of asset base would actually pay no or nearly no tax at all (very high tax free threshold combined with tax free allocated pensions).

  42. Socrates

    The whole idea that lowering the top tax rate helps retain “highly skilled” entepreneurs is about as believeable as the idea that giving CEOs large bonuses “aligns” their interests with investors. Most wealthy financier types are going to keep living in nice cosy spots like Belgravia or Zurich, and keep building their factories in China, regardless of the tax rate. All these people have is their money and their connections; they never leave. So, good for you Francoise Hollande.

    The real issues for me are the bottom tax rate, and tax deductions. Thanks to bracket creep the bottom rate claws the low paid far more than before. Recent improvements in the tax free threshold (to $6k) have helped, but it is still too high. When I first started working (1980s) the tax free threshold was about $4.5K. With inflation, that would be more like $15k today. Many part time workers in the 80s paid no tax.

    Meanwhile the ability to redefine income for the wealthy can see their taxable income bear no resemblence to their actual pay. So, Mr Banker, tell me again why your company provided you a Porsche Cayenne as a “work” car…?

    Why do we get this absurd debate? Because corporate executives use the power of their corporations to manipulate governments in their favour. As Alfred Venison said on another post, large corporations (or the executives who control them) are becoming a greater threat to nation states than other nation states.

  43. Katz

    Really? Compare say someone sitting on $1 million of assets (not unusual for retirees these days especially when you take into account the family home) against someone who has $0 assets but is earning $100,000 with a few family dependents.

    Yes, really.

    Let us consider that retiree with $1m in assets.

    Let us say that her home is valued at 300,000 — a modest amount. That leaves $700,000.

    Let us say that she she has just retired at age 60 and has all of that $700,000 in a superannuation accumulated benefit pension.

    Let us say that she takes 6% per annum of $700,000. At that rate she would be running down the accumulated capital at faster than replacement and she would be receiving a pension of about $42,000 per annum, which would run out at about age 80.

    This pensioner would have about 4-5 years of life expectation on zero private pension.

    At minimum 4% draw down on $700,000 the pensioner would still have funds at age 85 but her annual pension would be $28,000. Hardly a princely sum.

    So how much can this pensioner be taxed?

    And don’t forget that a $300,000 house is very much on the low side in most metropolitan markets.

  44. Chris

    The real issues for me are the bottom tax rate, and tax deductions. Thanks to bracket creep the bottom rate claws the low paid far more than before. Recent improvements in the tax free threshold (to $6k) have helped, but it is still too high. When I first started working (1980s) the tax free threshold was about $4.5K. With inflation, that would be more like $15k today. Many part time workers in the 80s paid no tax.

    The effective tax free threshold for low and to a certain extent middle income earners is $16k, so higher than your estimated inflation adjusted estimate. However in order to not give higher income earners a corresponding tax reduction (ie makes it cheaper), successive governments have used the LITO to have a much higher effective tax free threshold for those who earn less than about 60k.

    But you kind of end making a good point – the income tax system has become so complex its actually quite difficult to see how much income tax someone would pay for a given salary (add in FTB A as well for starters, then there are rent subsidies, etc). Its rather overdue for a big cleanup.

    Meanwhile the ability to redefine income for the wealthy can see their taxable income bear no resemblence to their actual pay. So, Mr Banker, tell me again why your company provided you a Porsche Cayenne as a “work” car…?

    I’d like salary packaging of cars in general to be removed. Have it based purely on kilometres driven for work purposes. But I’m sure the car industry lobby would be protesting very loudly.

  45. adrian

    Sam, don’t know about Singapore, but HK would be a great place to live.

    It has:
    – Transport and other infrastructure that puts Australian cities to shame, to the extent that we can only dream of here.
    – Vibrant culture, including wonderful restaurants
    – Places to get away from the crowds with easy public transport access

    I was amazed at the place when I visited last year.

  46. Chris

    Katz @ 43 – I think it would last a bit longer than that, but with those figures she would be paying absolutely no tax at all, perhaps even getting tax credit payments every year if she has franked dividends from a share portfolio. She certainly can afford pay some tax each year, reducing as her asset values reduce.

    Someone who was in the workforce would be paying around $4000-5000/year in tax at that salary. And $50,000/yr retirement wage is considered to be very comfortable (especially for a single person).

    The person on $100,000/year with a family to support has much higher expenses than a single retired person (for example for child support purposes, centrelink estimates each child to cost about $20,000/yr in after tax dollars).

  47. Katz

    Katz @ 43 – I think it would last a bit longer than that, but with those figures she would be paying absolutely no tax at all, perhaps even getting tax credit payments every year if she has franked dividends from a share portfolio.

    Nope. She’d be getting no dividends under my example because all of her liquid assets are in a super fund.

    I did the sums exactly this time. Under the conditions I nominated, assuming a default setting on superannuation investment strategy, her money would run out at age 86. Taxation would cause it to run out earlier. How early? Depends on the tax rate.

    Don’t get me wrong. Costello’s super scheme was a giant bribe to the baby boomers. But by now millions of retirees or soon-to-be-retired have organised their affairs on the basis of this giveaway. The political cost of meddling with it would be horrendous. There are millions of baby boomers and they vote.

  48. Guy

    Sam @35 and Adrian @43, I think either Singapore or Hong Kong would be great places to live for the right people – it depends to a large extent on how well you can fit in with the culture. With Singapore – particularly if you like humidity. 🙂

    Certainly Hong Kong is looking more and more like the global capital of finance for the 21st century with its proximity and close links to China.

    In any sense, the argument that people move to chase lower income tax rates is a furphy. People live where they like to live and where they are comfortable living, not where they can contribute as little to society as humanly possible. If there are people that do sort of thing, they represent the tiniest fraction of 1% of the population. Tycoons who move their assets around to avoid tax are effectively global anyway and operate globally, so there is generally little benefit in attracting their personal presence.

  49. faustusnotes

    Yes Guy, which is why we’re waiting for TerjeP to explain his reluctance to move to HK. Whatever his reasons, he’s living proof that his own argument is bullshit.

  50. Joe

    I think that by the end of this century, people will look back at neoconservatism and free-marketism much like we do on 20-C Facismus and Kommunismus (just trying to trick the thought police with strange spelling).

    In an overpopulated world, conflict-based systems lead to war.

    Neoconservatism is an incredible example of propaganda. It has nothing to do with conservatism– conservatism is only there to lend it a sense of lineage. The whole process of introducing, for example, religion back into politics, while at the same time focussing irrationally on finance and corporations, is only possible thanks to our (multi-)media environment.

  51. derrida derider

    Apologies in advance for the long comment, but I think it worth it.

    The question of the effects of a high top marginal tax rate is one that is very prone to myth-making on both left and right (different myths, of course). It ought to be primarily an empiric question, but no-one seems willing to respect the massive amount of academic research across decades and countries studying the question.

    The “tax cuts raise more money” “Atlas will shrug” “distribution doesn’t matter anyway” Right is, IMO, the worse offender here. But this Lefty myth that soaking the rich is possible through an income tax, will be enough to pay for a welfare state and will have no unwelcome effects is just as much a myth.

    Firstly, high marginal rates really do make it very, very hard to close loopholes – not least because it dramatically increases the motivation for well-heeled people to find such loopholes. The high marginal rates of the past were extremely uneven in their application – that’s why John D @3 paid them in the 70s while his boss undoubtedly didn’t. Vague talk about “closing loopholes” does not cut the mustard here, because the problems – both practical and equity – of doing so on a large scale are much bigger than you think.

    Secondly, if you set the threshold for these rates relatively low you’ll raise a fair amount of money but affect lots of people who are middle-class rather than rich – in particular, you really do risk undermining human capital accumulation (IMHO – and in this case its a well-read Humble Opinion – this is the most significant economic cost of this approach. In comparison the Right’s “Atlas will shrug” stuff – ie they’ll stop working – is actually relatively small beer).

    But if instead you set the thresholds high so that only the truly rich pay them then you’ll raise buggerall revenue – there are just too few truly rich people, at least outside the US.

    Sorry, but soaking the rich via income tax will not be nearly enough to pay for a big government sector, at least in Australia – you have to soak the average punter to do that. As I once cheekily told a minister “the beauty of taxing the poor is that there are so many of them”.

    If you doubt me on this I invite you to do some spreadsheeting exercises based on Table 2C of the tax stats and calculate the approximate revenue gains from different rates and thresholds.

    Now all that said, I’m sympathetic to the Saez argument (linked to by Centre Lefty @8) that the top rate should be set by empiric Laffer limits rather than by consideration of the welfare of those paying that rate. It’s a quite carefully argued position and does not depend on “envy”. Plus those Laffer limits are empirically measurable while the welfare of the rich isn’t. In the US it implies a top rate of about 65 cents in the dollar, probably slightly higher here (for reasons too long to explain).

  52. TerjeP

    Terje, why aren’t you living and working in Hong Kong, where the salaries are higher and the income tax is much, much lower?

    Hong Kong smells. Mostly due to pollution from China if what they tell me there is correct. Otherwise I love the place. Singapore I love also. They have some crazy restrictions on free speech but the place is very clean, relaxed, prospereous and income tax is wonderfully low relative to Australia. You can even buy beer at the 711. I have been very tempted to move there and actually had a very good job offer a year ago. Inertia and family are the main restraints. That said the patriot in me would like to see an Aussie tax revolution whether or not I am here to enjoy it. I take an interest in the public policy of lots of nations, even the ones I don’t live in. My view on tax rates are not purely, nor even predominately personal.

  53. TerjeP

    Remarkably, with marginal differences, rightists agree. When rightist governments take power, after huffing and puffing a lot, the end up sacking a few tea ladies. They talk the talk about reeling back government expenditure but seldom walk the walk. Instead of taxing, however, these rightists follow Reaganomics into huge deficits. These deficits arise from tax breaks for corporations and high income earners.

    This is tragically true. The centre right governments that manage to form government are nearly always somewhat into low tax rhetoric but rarely do they deliver or even seriously contemplate delivering. Per capita government spending exploded under Howard in spite of critics saying he slashed spending. Rudd then promised to be a fiscal conservative and got elected partly on that basis but then proved to be even worse. Basically it’s a waste of time voting and the fact that I do bother voting is a triumph of hope over reason. Of course on that basis I vote as principled as possible and put a 1 beside the Liberal Democrats (LDP).

  54. TerjeP

    A person on more than $100,000 per annum is highly privileged, IMO.

    In the ACT that income is only 10% above the median. But I suppose our policy mix does privaledge the citizens of Canberra quite a bit.

    http://en.wikipedia.org/wiki/Median_household_income_in_Australia_and_New_Zealand

  55. faustusnotes

    So TerjeP, you admit that people don’t move countries for tax reasons alone. Or are you somehow super-special? No? Then your entire argument is wrong.

  56. faustusnotes

    TerjeP, the median household income of Canberra is irrelevant – it’s 300,000 people out of a population of 22,000,000. Look at the median income of Australia – 66,000 – and ask yourself what percentile 100,000 is. The answer is not in wikipedia, though with a bit of effort you could screw it out of the ABS stats: it’s actually the 80th percentile, so only 20% of Australians earn that much or more. By comparison, 20% of Australians earn less than 40k.

    So is 100k wealthy?

    Choosing the median income of Canberra is such a classic example of cheap spin. You really have no shame do you?

  57. Chris

    Katz @ 47 – I disagree with some of your assumptions because once you retire you can pull a lot of your money out of your super fund with no tax penalties. So you can roll them over into allocated pensions where you pay can pay no tax at all or say into shares where you can get tax rebates via franked dividends.

    But I do agree with you that its politically almost impossible to fix now. Too many baby boomers would complain. The benefit of hitting the high income earners is that aren’t really that many of them, though as dd mentions because there are so few in the bigger picture you can’t actually get that much money out of them. And we end up with people “investing” in grapes and nuts just to reduce their taxable income.

    Though I did go to a financial advisor recently (time to get a bit serious about saving for retirement!) and it was a bit of an eye opener as to how with pretty low levels of investment risk (no crazy tax dodgy schemes) and essentially just rearranging how I have been saving/investing anyway I’d pay quite a bit less tax each year. As a bonus I’d qualify for more middle class welfare type payments. Should we have a tax system that is quite so inconsistent?

  58. Chris

    So is 100k wealthy?

    Kind of depends on how you define wealthy doesn’t it? Statistically high income? Yes. Wealthy? Personally I wouldn’t base a definition of wealthy on income, but on assets. As a friend of mine once claimed, a wealthy or rich person is one that financially speaking no longer needs a job to survive.

  59. Joe

    But Chris, that would mean that everyone in Australia is wealthy. In fact, in most countries you don’t need a job to survive. But I guess you didn’t mean that. People should think about it more often though…

    You know, I really think the instrumentalisation of wealth as being something which means you don’t have to work is ridiculous. Yeah, some jobs are horrible, and you should try and ditch them and move on as soon as possible, but ideally, you do like what you do– even while you need to be pragmatic about organising your life.

    So, in summary, 100K is wealthy and if you can’t get by on it, it’s probably fair to say, you’ve screwed something up.

  60. TerjeP

    Look at the median income of Australia – 66,000 – and ask yourself what percentile 100,000 is. The answer is not in wikipedia, though with a bit of effort you could screw it out of the ABS stats: it’s actually the 80th percentile, so only 20% of Australians earn that much or more. By comparison, 20% of Australians earn less than 40k.

    It’s roughly $1455 per week after tax which according to the ABS disposable income distribution chart for 2009/10 puts it around the 90th percentile.

    Do you think individuals on $100,000 should be paying more tax than they already do?

  61. duncan

    joe @ 59

    How many people does that $100k support? Where do they live?

    Sure a $100k single in a semi-rural area is laughing it up.

    A large family in one of our cities with one income, not so much.

    Looking at income alone is not useful, as has been pointed out above.

  62. Sam

    Terje, it was you who brought up the notion of “global labour markets”, “especially at the top end” yet when pressed admitted than in your own case – which is nearly everyone’s case – you can’t/won’t move to where the taxes are lowest.

    Apart from tennis players, who travel all year round and so might as well “live” in the country that has the lowest taxes, people do not engage in this kind of tax arbitrage. Even globally mobile senior executives, when surveyed about the important factors that determine where they choose to live, rarely put taxes at the top of the list or even close to it. They want to live in places that are safe, attractive, nice climate, rule of law, good to bring up kids – all the usual stuff.

    That doesn’t stop them – or useful idiots on their behalf – agitating for lower taxes once they are here. But it is a simple matter of calling their bluff. They aren’t going anywhere.

  63. derrida derider

    Sam and Duncan are making the mistake of saying “taxes are not the sole, or even main, determinant of where most people live, so therefore they don’t matter to where you live”. But the first thing that gets (correctly) hammered into you in Econ 101 is that it is the margin (the thing that can be changed) that matters for analysing choices. Just because most people prefer not to move away from family, culture, house, etc doesn’t mean that tax-motivated moves must be economically irrelevant.

    And you can empirically measure these effects – sometimes they are weak to the point of being undetectable, sometimes they are strong. Perhaps the strongest recent such thing in Australia is the influx of Kiwi graduates to Bondi when NZ massively increased the burden of student loans (ie HECS).

    Of course, if heavy taxation is paying for middle-class welfare (eg universal health coverage) then people will take that into account too. That’s why claims of a massive tax-driven brain drain from continental Europe are mostly garbage (and incidentally is also one among several reasons that assuming without further analysis that “middle class welfare” is something to be eliminated is silly).

  64. TerjeP

    They want to live in places that are safe, attractive, nice climate, rule of law, good to bring up kids – all the usual stuff.

    Yes. However just because tax isn’t the number one factor doesn’t mean it isn’t a factor at all. And in any case my comment in that regard was not so much about revenue but fairness (the revenue issue related to the limited quantum of wealth amongst the very rich as opposed to the merely above average). My global labour market comment was in response to Frans suggestion that the Australian median should be used as a baseline for a progressive tax system as if the Australian median is some objective cosmic reference point for social justice. That if I’m made more equal to somebody in Hobart the inequality with some bloke in Jakarta is less important. We could just as readily set our progressive tax rate on the basis of the Greek median income level and most people still wouldn’t leave the country. It doesn’t mean it wouldn’t suck.

  65. TerjeP

    Just to labour the point why fantasise about equalising Australian society when society is actually global?

  66. Chris

    Joe @ 59 – well to many in much poorer countries most Australians are wealthy. It does tend to be a relative term even within countries.

    But I was talking more about wealth meaning independence and security. Someone on 100,000/yr with a family to support with rent or mortgage to pay but little to no assets will be in a very poor position if they lose their job. In comparison i think a single person who has enough assets to generate say 40,000/yr and owns their own home is much wealthier than the person on a salary of 100,000.

  67. duncan

    @dd.

    Actually, my point was more than comparing average incomes, percentiles, or perceptions of wealth are meaningless if the costs of living are not factored in.

  68. duncan

    Chris @ 66,

    exactly. That 60k delta in pre-tax income can easily be consumed by housing costs alone.

  69. faustusnotes

    TerjeP, how come an income of 100k is in the 80th percentile before tax but the 90th percentile after? Doesn’t that mean the tax system is benefiting them …?

    and again, why do you think other workers would go overseas for better tax systems if you won’t?

  70. Sam

    DD, your Econ 101 analysis is inapplicable. It’s not like buying a few less bananas because the price has gone up. The choice is living in Hong Kong 100% of the time or Australia 100% of the time. That is a big fat discrete decision, not a marginal decision.

    There will be a handful of people who will move from country A to country B because country B has become more attractive, tax wise, but only a handful. It is ludicrous to make tax policy, which affects everybody, on the basis of what this handful might or might not do.

  71. Sam

    And the influx of Kiwis is a very special case because we are essentially the same country as them in terms of the life style factors that affect choice of location.

  72. TerjeP

    So should the Kiwis set their income tax scales on the basis of their median income or on the basis of the median across both Australia and New Zealand?

    And just as an aside I think we should have a bilateral free immigration agreement with Singapore on the same terms as the agreement we have with New Zealand.

  73. Sam

    Piggy Muldoon maintained that migration from New Zealand to Australia increased the average IQ of both countries, so maybe not.

    We could have free movement of people between Australia and Singapore, but that doesn’t mean there’d be a rush of people. I quite like living in a country where I can put shit on the government in a blog without fear of repurcussions from the authorities. Try doing that in Singapore.

  74. Katz

    Chris:

    it was a bit of an eye opener as to how with pretty low levels of investment risk (no crazy tax dodgy schemes) and essentially just rearranging how I have been saving/investing anyway I’d pay quite a bit less tax each year. As a bonus I’d qualify for more middle class welfare type payments. Should we have a tax system that is quite so inconsistent?

    Yes but don’t forget that if too many underfunded baby boomers started demanding pensions — a phenomenon that could have come on as suddenly as the birth of all those BBs all those decades ago — the public finances of the Cwth Govt would have been shot to ribbons. The current scheme is cunningly designed to prevent or delay the addition of BBs to the list of pension recipients. Instead, BBs will stay off those lists altogether by virtue of self sufficiency or mortality, or will be gradually fed into the system on reduced levels of entitlement.

    This solution may look cynical. But the BBs, as they have done throughout their lives, posed unprecedented demands on the economy, governments, and social norms.

  75. Joe

    Hi Chris,

    I meant that even poor Australians are rich and not even relatively– Australia is second on the Human Development Index. There’s no reason that you should starve anywhere in Australia where other people live. Freedom of movement, etc. is all take for granted. A great natural environment, etc.

    If people have more kids to look after and want to live in an expensive suburb, when they can’t really afford to, that doesn’t say much about whether or not they’re wealthy. That’s an organisational issue. Australia should stop chasing after wealth– it’s a chimera. We need values– sound Christian? Sorry, we need humanist values, because that’s where real wealth can be found.

  76. James McDonough

    “We could just not have income tax at all. The government doesn’t need income tax receipts in order to function” – Sam Bauers @ 17
    Probably doesn’t deserve the rude responses it drew. Taxes on property or expenditure are both capable of funding government, and there are probably other alternatives that I’m ignorant of.
    Personally I favour a reign of terror: the state executes the rich and distributes their belongings to the poor. Eventually the poor tire of mediated violence and run amok in a frenzy of bloodlust.