The tax man’s “taken all my dough”

Limited News comes down hard today with some actual right-wing policy: pushing for tax cuts (at the implicit expense of public services, not that that matters to News):

Hello Taxman, goodbye payrise

MORE than one million Australians will have pay rises eaten up over the next three years because tax cuts are off the agenda for both parties.

Really? Pay rises will be “eaten up” by taxes not falling? How would that work then? Where are these 100% tax rates that are going to consume all our extra income?

Workers who earn $73,000 a year, the average total weekly earnings for males in New South Wales, will be pushed from the 30c tax bracket to the 37c tax bracket by 2013.

Ah, bracket creep. So the earlier headline implying that Australians would say “goodbye” to their payrise, and the claim that it would be “eaten up” by tax, are just dishonest, fearmongering, misleading exaggerations. Exaggerations that the whingers will, of course, lap up.


Won’t somebody think of the stately homes?

You’d think that every taxpayer would know this, but apparently many don’t (or choose to pretend they don’t): when you get “pushed” into a new tax bracket, it’s only on that income above that tax threshold.

No Australian pays tax on their first $6,000 – even the very rich. Every Australian who earns more than $6,000 pays 15% on that portion of their income above $6,000 and below $35,000. Every Australian who earns more than $35,000 still pays only 15% on their income below $35,000 and above $6,000, and – as I said before but people forget – zero on their income below $6,000, and then they pay 30% on that portion of their income between $35,000 and $80,000. If they’re fortunate enough to earn from $80,000 to $180,000, they pay 38c on each dollar between $80,000 and $180,000, whilst still paying the lower rates on each dollar below $80,000. And if they’re in the very top level of earners, on above $180,000, they pay 45% on that portion of their income above $180,000 – whilst still paying the lower rates on all their income down to the tax-free $6,000 at the bottom.

The point is, if your income goes into the next threshold, that tax rate only applies to the extra income, not the income you previously had. And since that tax rate is never 100%, it can’t “eat up” that pay rise.

Now, it’s true that inflation PLUS the new tax bracket might do some damage to that pay rise, but for that to be work the inflation would have to consume the other 55% of those extra dollars, which seems rather unlikely. And if inflation is ever as ridiculously high as that, paying 7% extra tax on money over $180,000 is hardly going to be the thing that consumes your pay rise. It’d also be the least of your worries.

Fortunately for News Ltd, there are a lot of Australians (including some readers of this blog) who think that being “in a higher tax bracket” means they pay more tax on the rest of their income, and that they’re somehow worse off if they earn more. Then again, these are the same people who would rather pay an accountant $1000 to get them out of paying $500 to the tax office, people who would rather set their money on fire than it go to the government to pay for public services. Rationality is hardly the point.

PS: I do agree that tax rate threshholds should be indexed to CPI to account for inflation. Same with salaries and pensions. But what’s the bet the people enthralled by the former idea are relentlessly opposed to the latter?

(I suspect the reason both Labor and Liberal governments don’t do it is that they like to be able to give “tax cuts” as an unexpected positive. If the bracket creep was fixed automatically, they’d lose the ability to do this without seriously hurting budgets. Voters react better to “here’s a sudden tax cut courtesy of your benevolent Prime Minister” than “the system has automatically reduced your rate of tax”. Indexing brackets to CPI is a one-off good, which most taxpayers will hardly understand: regular tax cuts are an ongoing boon for sitting governments.)

UPDATE: I meant tax rate threshholds being linked to CPI, but originally just said “tax rates”. Another suggestion is having the threshholds determined according to percentiles of taxpayers – so the top 5% always pays the top rate, the bottom 5% always pays nothing, etc. Whatever roughly matches the present situation, but inflation-proofed. You’d need to give taxpayers warning, though, so for 2010-2011 you’d announce the rates in May 2010 based on the figures from the 2008-2009 financial year.

Advertisements

11 responses to “The tax man’s “taken all my dough”

  1. As a professional tax advisor I heartily endorse everything you’ve written above except for the following:

    PS: I do agree that tax rates should be indexed to CPI to account for inflation. Same with salaries and pensions.

    You can’t index tax rates to the CPI otherwise the government’s tax revenue would constantly fall. Eventually the government would be earning a pittance in devalued currency.

    It’s salaries (or other income sources) that must be indexed to inflation.

  2. jordanrastrick

    Eh regular piece of partisan Framing bullcrap from News. At least one good side effect of the bipartisan obsession with paying.

    Tax brackets should be indexed to CPI, as should pensions. Salaries and wages most certainly should not.

  3. “at the implicit expense of public services”

    A misleading (and, technically, false) dichotomy.

    Firstly, labelling them ‘services’ allows you to imply that anyone advocating spending cuts is ripping away vital components of society. Of course, your opponents in this context perform the same linguistic trick by labelling them ‘waste’ or similar.

    Secondly, not all spending is created equal. Even at the level of opinion, no-one approves of absolutely everything the government spends money on, regardless of their politics. More importantly, on an objective level, some spending passes a CBA and some doesn’t.

    Thirdly, if some spending is wasteful, then reducing or eliminating that portion means better outcomes for society.

    Lastly, tax cuts can increase the tax take (depending on many things).

  4. Splatterbottom

    Mondo:

    Eventually the government would be earning a pittance in devalued currency.

    Sounds like a good way to encourage the bastards to avoid inflationary spending.

  5. jordanrastrick

    “Secondly, not all spending is created equal. Even at the level of opinion, no-one approves of absolutely everything the government spends money on, regardless of their politics.

    More importantly, on an objective level, some spending passes a CBA and some doesn’t.”

    Agreed; but tax cuts can only be advocated on either a fiscal policy basis (the government should go into more or less debt for cyclical reasons) or a re-prioritisation of funds basis (this money spent on a sports stadium would be better spent on a hospital.) In either case proposed reductions in tax revenue should be treated like any other form of government “spending” in terms of CBA; of course your mileage may vary depending on utility function. E.g. a radical libertarian may argue that costs outweigh benefits for any spending which doesn’t directly uphold the rule of law as an means to supporting the free market “fails” a CBA, a priori.

    “Thirdly, if some spending is wasteful, then reducing or eliminating that portion means better outcomes for society.”

    Of course, but we should always look to minimise wasteful spending; whether the resulting savings should be spent on tax cuts or other services is an orthogonal argument. Really this is just another instance of the above.

    “Lastly, tax cuts can increase the tax take (depending on many things).”

    Sure, in theory. But I seriously doubt Australia is on that point of the Laffer curve. What we need is not lower rates of tax, but more efficient taxation and more intelligent regulation, to eliminate deadweight losses, minimise compliance burden, etc.

  6. Hmm, Mondo, you’re right. I see the folly of setting tax rates to CPI. They should be automatically adjusted so they capture the same proportion of taxpayers based on previous year’s returns – eg top rate at level of top 5%, next rate at level of top 15%, or whatever the equivalent to now is.

    Any reason that wouldn’t work?

    And Jarrah – I don’t disagree that some savings could come from better running of services, but to get the real tax cuts News Ltd wants and advocates in the article, there would clearly need to be services cut.

  7. They should be automatically adjusted so they capture the same proportion of taxpayers based on previous year’s returns – eg top rate at level of top 5%, next rate at level of top 15%, or whatever the equivalent to now is.

    So instead of having set income levels for each marginal tax rate, there would instead be population bands?

    It’s not a bad concept in theory, however in principle it would be very difficult to manage. You wouldn’t know what your marginal tax rate was until the end of the year when the percentages were calculated.

    As Jordan has suggested above, the better option would be to link the marginal tax thresholds to CPI (i.e. not the rates, but the income thresholds). That would eliminate bracket creep, even though I agree with you that it’s a relatively inconsequential issue.

  8. That’s what I was originally proposing, but the language was clumsy. I didn’t mean the rates would change with CPI (how could they? They’re a percentage, not an income figure), I meant the threshholds. So the 180k threshhold would go up to 182k or something.

    I still think population bands could work, and work better – but you’d have to have a delay built in so people knew before the year commenced which rates applied. Easy enough though: the threshholds for 2010-2011 would be based on the ATO figures for all tax paid for the 2008-2009 year, announced by say the end of May 2010.

    Any reason that wouldn’t work?

    I mean, it’s obvious why the ALP and Liberals will never do it, as I note in the post – their politicians like doling out tax cuts arbitrarily instead – but in terms of what would be good policy.

  9. That’s what I was originally proposing, but the language was clumsy.

    Fair call Lefty. I was being overly pedantic in my response.

    Any reason that wouldn’t work?

    Other than its inherent complexity, and the pitfalls that generally come with complexity, no.

  10. Ah…never let the truth get in the way of a good story Jeremy. I’m always amazed at how few people understand the tax system. I’m not saying it’s dead simple but the basic concepts really aren’t that hard to grasp…if you take the time to get informed (properly)

  11. its interesting that most countries who have progressive tax brackets DONT index them

    of 26 OECD countries, only 4 do

    how thoughtless of them! hundreds of highly paid, intelligent tax analysts and designers, all making such a silly mistake *shakes head*

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s