Progressive income tax

According to this table Australia has the second most (after the US) progressive income tax system in the OECD. Please remember that the tax rate is not the same thing as the tax burden – Australia does not have the second highest personal income tax rate in the OECD.

(HT: Tax Policy Blog)

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30 Responses to Progressive income tax

  1. Peter Whiteford

    Thanks Sinclair for citing my calculations!

    Lots more details can be found at http://www.taxreview.treasury.gov.au/content/Content.aspx?doc=html/conference.htm or in the OECD chapter referred to.

    A better measure shown in both sources is the concentration (Gini) coefficient for taxes which covers everyone paying taxes and not just the richest 10%. A number of other countries like Ireland, Italy and the United Kingdom collect a higher share of taxes from the richest 10% but because the richest 10% in those countries have a higher share of taxable income overall they are not as progressive as Australia.

    Two points – for other countries these figures also include employee social security contributions which we and New Zealand) don’t have.

    More important is the question of what doesn’t get included in taxable income and therefore doesn’t get taxed. As the example of Italy suggests what these figures show is the progressivity of taxes when you believe that incomes are accurately reported. It also disregards income components that aren’t necessarily included comprehensively in taxable income, like salary sacrifice in Australia.

  2. Sinclair Davidson

    Peter – you should email me stuff if you think its interesting.

  3. Michael Fisk

    But Sinkers, I have it on good authority that Australia’s tax system is “roughly proportionate”. How can these figures be true?

  4. What about Italy? It looks to be up there with the US and Australia.

    Although I’m struggling to understand the table. Is the last column the important one? More explanation required please, Professor Davidson.

  5. Sinclair Davidson

    David – yes, the last column is the important one – how much of the share of income the top decile have divided by the share of income tax. So what is the tax burden as a % of income.

  6. Peter Whiteford

    Not quite. It’s the share of direct taxes (income tax here but including employee social security contributions in other countries) divided by their share of market income; this is in order to standardise for the fact that part of the reason why richer households pay more tax is that they have more income.

    If you had a completely flat tax rate without a threshold then rich households would pay a higher share of taxes because they have a higher share of income.

    Michael Fisk – if you included the GST then the overall system would be closer to proportionate, but because thiese figures are calculated from household income surveys they don’t include indirect taxes.

  7. TerjeP

    I’d be happy to see the bottom nine deciles pay zero income tax. It would be a lot more progressive but none the less it would also be a good start.

  8. TerjeP

    p.s. Does anybody know how much you need to earn to be in the top decile?

  9. Peter Whiteford

    Terje

    It depends. in 2008 a single person would be in the top decile if their disposable income was over $71,000, a couple would need an income of $106,000 and a couple with two children would need an income of $149,000 to be in the top decile (obviously taking family size into account).

  10. Sinclair Davidson

    (income tax here but including employee social security contributions in other countries)

    Peter – Here it would exclude super contributions.

  11. TerjeP

    Peter – thanks.

    I definitely think the first $71,000 in income should be tax free. What would the ratio be for Australia then?

  12. Peter Whiteford

    If you made the first $71,000 tax free then income tax collections would plummet. You may have a more “progressive” tax system, but you couldn’t afford to pay social security benefits, so the overall system of taxes and benefits would be much less progressive than now.

    Sinclair, yes you’re right – superannuation contributions are not included in taxes.

  13. TerjeP

    Peter – doesn’t that statement undermine the metric you are promoting?

  14. jtfsoon

    Terje
    if only the top decile paid tax it would be a turkey before thanksgiving. stop promoting these commie ideas

  15. TerjeP

    Peter – forgive me but I’m a bit confused now as to what your metric actually says about one country relative to another. I suggested a reformed situation in Australia which your measure would class as highly progressive, but you have suggested that my reform would be much less progressive. In which it seems that your table does not tell us much about how progressive countries actually are relative to one another.

  16. TerjeP

    Last sentense should start “In which case it seems …”

  17. JC

    Terje;

    It would basically mean well less than 50% of the population paid income tax- perhaps 30% or less. The US has tried that and you end up with the large slab of non payers going after the bigger earners like predators.

    That idea sucks big time.

    You used to be for a flat tax. You sold that down the river quickly, yea?

  18. TerjeP

    Jason – I’m a bit appalled by your rhetoric. How can abolishing all income tax on the first $71000 of income be characterised as commie?

  19. TerjeP

    JC – I have never ever been for a flat tax.

  20. TerjeP

    p.s. Unless it is a flat tax of 0% rate. In which case I’m a huge fan.

  21. TerjeP

    p.s. If you think the LDP promoted a flat tax under 30/30 then you haven’t understood the tax.

  22. JC

    I’m a bit appalled by your rhetoric. How can abolishing all income tax on the first $71000 of income be characterised as commie?

    What can you fund at that threshold unless the rates went sky high?

  23. JC

    You seem unable to understand the nuance here, Terje.

    The big issue is the spending. What exactly would you do to lower the spending to equal the tax receipts about your suggested threshold without hitting people with 95% tax rates.

    That’s what I think Jason is alluding to when he calls you a commie.

  24. JC

    oops…. at your suggested threshold …

  25. Peter Whiteford

    Terje

    The table shows the distribution of taxes, so the metric is how progressive are taxes, and the measure is consistent across countries. It is a way of comparing how progressive taxes are – but it doesn’t show the level of taxes.

    The table above also doesn’t show the distribution of benefits or government spending, although the OECD chapter I wrote does this as well.

    If you want to know what effect government has on the distribution of income then you need to look at both taxes and benefits together.

    Now if you raised the tax threshold to $71,000 (and made adjustments for families) then I would say that income tax would fall by around 80%, since not only would everyone with lower incomes not pay any income tax, but everyone above this level would pay much less tax (since they wouldn’t be paying tax on the first $70,000 of their income.

    AS JC points out if you wanted to get as much money as currently from people above this threshold then their rates would have to go sky high – I suspect confiscatory would be the apt description.

    Now I’m sure that this is not what you are proposing – but if you cut income taxes by 80% then you would have to slash spending. This would be regressive and more than offset whatever greater progressivity you had in the tax system.

  26. TerjeP

    Peter – thanks for the clarification.

    Just to be clear I was not suggesting any increase in the deficit. I was envisaging a cut in spending. I’m not a commie.

    The best way to pay for such a reform would be over time through growth. So you might incrementally increase the tax free threshold year on year paid for by holding spending constant (in real per capita terms) as the economy grew. Based on previous calculations this would allow this sort of reduction to tax rates to be phased in over 10-15 years. A few more years and you could abolish income tax entirely. Numbers here:-

    http://blog.libertarian.org.au/2009/08/18/halve-income-tax-rates-by-2020/

    Peter you suggest above that an immediate introduction of a $71000 tax free threshold would reduce income tax revenues by 80%. Based on the budget number in table 2 of the following budget webpage this would mean total federal revenue would fall from $294 billion to $143billion.

    http://www.budget.gov.au/2009-10/content/fbo/html/part_1.htm

    Could we pay for such a reduction? If I had to try to pay for this my first move would be to transform Medicare into a debt based system. There is about $109billion in health outlays in the budget. I’ve refered to this previously as medicare HECS.

    http://blog.libertarian.org.au/2008/04/04/medicare-should-be-like-hecs/

    I haven’t done the numbers in detail but at a guess I’d say that it would yield a budget saving of about $80 billion once fully implemented.

    Next I’d look at welfare. Elliminating income tax on the first $70k would no doubt produce some dynamic employment and investment benefits that would reduce welfare. But for the sake of a conversation let’s not bank on it.

    In the end I think I’d do about half of it through medicare reform, and the bulk of the second half through economic growth coupled with spending constraint.

    Obviously the ultimate aim should be to abolish income tax entirely for all income earners and not just the bottom 90%.

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