Thursday, 6 March 2014

The rich don't pay a 'fair share' of tax ...

In his article No, the rich don't pay a 'fair share' of tax—just most of it, Adam Creighton, Economics Correspondent for The Australian writes
...only the top fifth of households paid any tax. The bottom 6.9 million households got more in cash welfare and services than they paid in.
Interesting. Perhaps I should strive to be poorer so that I become richer!

According to his Centre for Independent Studies bio, Creighton started his career at the RBA and for six years was an (award winning) checkout operator at Woolworths. Perhaps that was where he developed his economic outlook? Some more quotes:
Only the top fifth of households ranked by their income—those with incomes of more than $200,000 a year in the financial year ending June 2012—pay anything into the system net of the value of social security in cash and kind received, according to data from the latest Australian Bureau of Statistics survey of household income. The distribution of personal income tax—the federal government’s biggest source of revenue, raising about 45 per cent of the total ($165 billion this year)—is far more progressive than headline marginal tax rates suggest. Including the 1.5 per cent Medicare levy, Australia’s income tax rates range from 19 per cent for every dollar of income above $18,200 to 46.5 per cent for every dollar above $180,000. Most taxpayers face a 34.5 per cent marginal rate. But average income tax rates on households’ privately generated income (ordinarily wages and salaries, but dividends and rental income too) ranged from 1.5 per cent for the bottom fifth of households in 2012 to 22 per cent for the top fifth.
There is no explanation of how this is possible. How do these ‘‘rich’’ households pay only 22 per cent tax?
In the financial year ending June 2010, what one might call ‘‘holistic average tax rates’’ (including indirect and direct taxes and net of social security in cash and kind) ranged from -64 per cent for the bottom quintile, to -22 per cent for median households and 13 per cent for the top fifth of households. Put simply, only the top fifth of households paid any tax. 
Even more interesting; how do these ‘‘rich’’ households pay only 13 per cent average tax?
It is absurd to claim the ‘‘rich’’—assuming incomes rather than wealth are the defining criterion—aren’t paying their ‘‘fair share’’ of tax when they in fact pay all of it. 
Really?  Curiously, the elephant in the room is not mentioned; how can an article about salary and tax not mention salary packaging?

The note at the bottom of the (unattractive) figure in the article, mentions imputed rent, stating that homeowners enjoy (untaxed) income from not having to pay rent. Sounds reasonable. However, there is no mention of the additional benefit that selling your own home is not subject to CGT.
[I]ncome tax becomes more progressive every year without any deliberate change because of what economists call ‘‘fiscal drag’’. Because the income tax thresholds are fixed in nominal terms and prices tend to rise, every year more taxpayers are pushed into ever-higher tax brackets and larger portions of their real incomes are taxed at higher rates.
True. But this could easily be solved by indexing the tax thresholds, which neither of the main parties want.
The massive disparity between gross and net payments of tax—12.6 million people lodged income tax returns in 2010-11—suggests ‘‘churn’’ is rampant and an immensely complex system is rife for rationalisation: we have more than 100 different taxes across three tiers of government interacting with a multitude of social security services in cash and kind. The administrative costs of collecting taxes—especially income tax—are large, not to mention the damage they cause to enterprise and effort.
While questioning the numbers, and the framework of the analysis, it is hard to disagree with this observation. One solution would be to increase the GST rate, reduce income tax, raise the thresholds, and eliminate all deductions. But careful modelling is required to determine the true impact of all these changes (see e.g. here), and ensure that the changes are fair to everyone. There's a contradiction here though: if we change the rates there must be winners and losers—and the losers are unlikely to be happy.
While the scope and size of governments have soared since then, the price of civilisation still, rightly, falls disproportionately on the richest.
So now he's saying the ‘‘rich’’ should pay more? Seems reasonable ...
The distribution of tax is not the problem but its growth as a share of national income is (along with undue focus on income rather than wealth as the determinant of someone’s capacity to pay).
Surely he's not proposing a wealth tax! So what is he suggesting? I think that Rupert didn't read this paragraph carefully enough prior to publication.
The moral case for fixed, reasonable taxes may resonate more than the pure economic one. Arbitrary increases in taxes to pay for services the market can and should provide offend the rule of law and erode individual property rights.
If there was one set of immutable tax rates that was truly fair to everyone then that's what should apply from now to eternity. Now try to get all Australians to agree on those rates ...

As Greg Jericho (who also makes no mention of salary packaging) writes:
Always remember when someone starts talking to you about how there should be just one flat tax rate for everyone, who really will be winning out of the change? Unless you happen to be one of Creighton’s barristers or chief financial officers, it most likely is not going to be you.

2 comments:

  1. This is also critiqued by John Quiggin http://johnquiggin.com/2014/03/05/identity-crisis-2/. Quiggin categorised this under "#Ozfail" and "Boneheaded stupidity".

    But it is interesting to note how the benefits of taxation are distributed. For example, when one looks at defence expenditure, I would argue that it provides almost no benefit to the poor, but a lot to the rich. And of course, if you look at the benefit of law and order, you'll find again that the rich are the major beneficiaries.

    It would be interesting to get a left leaning economist to try and quantify this.

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