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.