The left in denial

Peter Whiteford asks the question*

Sinclair

You say “On his watch tax rates for low-income earners will rise – effective marginal tax rates will also increase from next year.”

But no one will experience an increase in average income tax rates, and for low income earners they will fall. Marginal tax rates will rise for some low income earners, but they will fall for others, and stay the same for most people.

In case anyone has actually missed the facts. Here are the proposed tax scales.

If you look, very carefully, you’ll notice that the tax rates for low income earners rises from 15 percent to 19 percent and the 30 percent rate rises to 33 percent. Now that is consistent with my claim that tax rates for low-income earners will rise.

Then see this graph (pg. 10) released by the government just yesterday.

So all up tax rates are up and EMTRs are up – just like I said. This is a tad inconsistent with what Julia Gillard was saying

This doesn’t just help people moving from welfare to work.
It also helps women who work part-time as well.
Take a family where the kids are at primary school and mum is working part time earning, say, $16 000 a year. Currently she has no net tax liability. But she does have some tax withheld from her take home pay – and she can’t claim it back until after the end of the financial year. What’s more, if she gets an extra shift or takes on extra regular hours worth, say, an extra $4 000, that’ll lift her over the tax free threshold and cost her $600 a year in tax. Now, because of our tax cuts, she’ll pay no tax at all on that extra income and have very little tax withheld as well.
She’s among half a million people who go from having to pay tax to paying no tax – and of those, three hundred thousand are women. And while forty four per cent of taxpayers are women – sixty per cent of the people who get this tax cut are women.
This is a tax cut for working women.
A tax reform which rewards work.

It rewards work – as long as you don’t get a pay increase or aspire to get a pay increase.

* this is not an invitation to launch into Peter – but rather let’s concentrate on the actual issue – the carbon tax compensation policy creates disincentives through the interaction with the welfare system.

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43 Responses to The left in denial

  1. m0nty

    Isn’t this just an argument over different definitions? You’re talking marginal tax rates, he’s talking average tax rates. You’re both right according to your definitions. Unless I’m missing something, doesn’t the increase in marginal tax rate for low income earners get more than offset by the raised threshold?

  2. Sinclair Davidson

    No. He’s putting words in my mouth and trying to change the subject.

  3. ar

    They’re in denial all right. In a letter to the editor in the local rag a reader insists folks on up to $80k will be $2075PA better off due to increasing tax-free threshold. Didn’t read the fine print about the other marginal rates.

    Headed “Gillard doing us a favour” he makes an hilarious argument and offers some suggestions on what the hoi polloi will spend their cash on.

    Gillard doing us a favour

    Zoom in for a laugh…

  4. johno

    ‘Soak the poor’. This has to be a new low, even for Juliar.

  5. johno

    Sinclair you left out the word ‘dioxide’ in the last sentence. Gillard is taxing carbon dioxide, not carbon. Just because she doesn’t know what she is doing, no need for the rest of us to get it wrong.

  6. Gabrielle

    I’ll second that, Johno. Although I’m tipping Sinclair simply forgot to add dioxide.

  7. Jim Rose

    johno,

    Carbon dioxide (CO2) is a naturally occurring chemical compound composed of two oxygen atoms covalently bonded to a single carbon atom.

    Industrial carbon dioxide is produced six ways:

    1. Directly from natural carbon dioxide springs, where it is produced by the action of acidified water on limestone or dolomite.

    2. As a by-product of hydrogen production plants, where methane is converted to CO2;
    3. From combustion of fossil fuels and wood;

    4. As a by-product of fermentation of sugar in the brewing of beer, whisky and other alcoholic beverages;

    5. From thermal decomposition of limestone, CaCO3, in the manufacture of lime

    see http://en.wikipedia.org/wiki/Carbon_dioxide

  8. TerjeP

    Jim – fugitive emissions will also be subject to the carbon tax.

  9. TerjeP

    Chart 2 is both brilliant and tragic. Brilliant in it’s illustration of the perversions created by medicare and LITO and tragic in so far as it is well understood and yet it has never been fixed.

  10. Peter Whiteford

    Sinclair

    You say that I am putting words in your mouth. But your words in the Drum article are “On his watch tax rates for low-income earners will rise – effective marginal tax rates will also increase from next year.”

    These are your words not mine.

    Monty’s comments are corrrect. I am saying that average tax rates will not rise, but for low income earners they will fall. You are now concentrating on marginal rates.

    Now maybe I am over-interpreting your use of the word “also”, but my interpretation is that you said that both average and marginal rates will rise.

    I am disagreeing the first part of this statement – and I partially agreed with the second part, which has always been clear. Marginal rates will rise for some people in certain income ranges by 4 percentage points.

    But you are not clearly acknowledging that marginal rates will also fall for some low income people by 15 percentage points, a much more substantial change.

    It is also worth noting that Wayne Swan’s “watch” included earlier tax cuts that raised the effective tax threshold quite substantially.

  11. Pedro

    That’s not denial, it’s an argument past each other. OTOH, wayne swans past tax changes have nothing to do with the quality of the compensation for the carbon tax.

  12. RodClarke

    Peter – surely you know that its what happens at the margin thats important.

    You know Econ 101?

  13. RodClarke

    As in someone going from 15K to 16K (i.e. going from $280 per week to $310 by working some o/t or more responsibilities) suddenly gets hit with %15 tax.

    and then going from $360 to $380 per week only to get slugged 25% .

    these High marginal EMTRS are a massive disincentive.

  14. Sinclair Davidson

    Sinclair you left out the word ‘dioxide’ in the last sentence.

    Yes, I did. That’s because in public debate the government’s policy is called ‘the carbon tax’. Calling it the carbon dioxide tax is more correct and so on, but doesn’t add value. I’m referring to a specific policy and everyone knows the policy I’m referring to.

  15. Sinclair Davidson

    Peter – I understand you’re saying average tax rates won’t rise. You’ve said that before. How that relates to my point that the tax rates for people in the low-tax brackets will increase is obscure. If deadweight weight losses are a function of marginal rates, not average rates, the policy is a poor one. My criticism here against Swan is exactly the criticism I used to levy against Costello. If you’re engaging in tax reform and making claims about work incentives you have to lower marginal rates. This hasn’t happened. In the current situation Swan is especially at fault because he used to crap on and on about EMTRs – going up under this policy.

  16. Sinclair Davidson

    Terje – to be fair, fixing the EMTRs is difficult given the other policy choices government makes. These are choices you and I wouldn’t make partly for that reason.

  17. Milton Von Smith

    “On his watch tax rates for low-income earners will rise – effective marginal tax rates will also increase from next year”.

    Peter, this is clearly a reference to statutory rates, and then to EMTRs. Average rates aren’t mentioned. Live with it.

  18. John A

    Mr Whiteford’s claim is focused entirely on individual taxpayers.

    However, both the marginal rates and the absence of the tax-free threshold will have a very deleterious effect upon the non-profit sector.

    If a non-profit happens to make a profit, it will be paying more tax. And this will be a dis-incentive, so that finance managers and committees of management will be marginally less-inclined to protect their funds by say upping their prices, or ensuring they cover their costs.

    It’s a subtle erosion of one of their fiduciary duties to protect the funds under their charge.

    Policy moving in the wrong direction, methinks.

  19. John A

    Sorry – please soften “very deleterious” to “deleterious”.

  20. Peter Whiteford

    Rod Clarke
    “As in someone going from 15K to 16K (i.e. going from $280 per week to $310 by working some o/t or more responsibilities) suddenly gets hit with %15 tax.

    and then going from $360 to $380 per week only to get slugged 25% .”

    Under the current tax scale someone going from $15k to $16k faces a zero marginal rate. Under next year’s tax scale, the zero rate will apply up to incomes of $18,200.

  21. .

    The point Sinclair makes is valid. The carbon tax fucks up poverty traps even more.

    This Government are too ignorant to give a shit about poor people.

  22. Rafe Champion

    Add the poison pills that are working their way through the system under the Fair Work Act and the marginal workers of the nation are in for bad times. Not to mention the cost of power.

  23. Peter Whiteford

    Right from the start I have made it clear that marginal rates will rise over some income ranges.

    I interpret Sinclair’s post as referring to average rates – now Milton argues it is statutory rates. We would not have had this disagreement if Sinclair had made that meaning clear – if that is what he intended.

    However, it also remains the case that many low income earners will face much lower marginal rates under the new tax scale.

    Until very recently, the way the LITO operates is that people started to pay tax over $6,000 a year and the LITO meant that if your taxable income was less than $16,000 you got your tax refunded after the end of the financial year. So low income earners faced a marginal rate of 15% while earning. By building the LITO into the tax scale and raising the actual threshold to $18,200 the marginal rate at the point of earnings falls to zero. So about a million people will be completely taken out of the tax system.

  24. Sinclair Davidson

    Peter – as far as I can see you’re the only person who was confused by what I wrote.

  25. Peter Whiteford

    So Sinclair you agree that average tax rates on low income earners will fall?

  26. Johno

    ‘Calling it the carbon dioxide tax is more correct and so on, but doesn’t add value. I’m referring to a specific policy and everyone knows the policy I’m referring to.’

    Well,yes, but why perpetuate her lie. The more people start calling her tax by it’s correct name, the more her scam will be seen for what it is.

  27. Skuter

    I interpreted Sinc’s initial comments as referring to statutory and effective marginal rates. I personally couldn’t see how average rates came into the discussion.

  28. Michael Sutcliffe

    The removal of the LITO has been praised as a positive move in various ‘free market’ corners. Pleny agree what has been done in that regard is a good thing.

    Peter, would you agree that that’s the only real reform that’s happened here; everything else is either negligible or slightly worse? Furthermore, there is no way an honest government should sell it as a tax reduction, or a benefit to productive working people?

  29. TerjeP

    LITO is still lurking waiting for the rates to be tweaked again and it’s oddball behaviour brought back into service. It should have been abolished outright and then purged from political memory. Why is abolition such a difficult concept. We did it with death duties. We ought to do it with LITO and ultimately with income tax entirely.

  30. Sinclair Davidson

    So Sinclair you agree that average tax rates on low income earners will fall?

    Relevance?

    To the extent that the tax-free rate has increased the average tax rate for all taxpayers will fall. From memory it’s about $3 for people above $80,000. That $3 decline as a proportion of taxation is very small but it is a decline.

    I interpreted Sinc’s initial comments as referring to statutory and effective marginal rates. I personally couldn’t see how average rates came into the discussion.

    This is a stunt to muddy the waters – the facts are, as demonstrated in government documentation linked above, that tax rates will rise and EMTRs will rise as I claimed. Given that Peter is the only person who is talking about average tax rates, surely it’s up to him to explain why they and not marginal tax rates are important.

  31. Peter Whiteford

    Sinclair

    You are now making the distinction between statutory rates and marginal rates, which you didn’t make in your original post on the Drum or in the post above.

    This distinction is also questionable, since the statutory rates are simply the schedule of marginal rates, by definition.

    What I was objecting to was the impression that your original wording gave that average tax rates will rise, when they will fall for low income earners.

    You have also not acknowledged that marginal rates will fall for some low income earners, and given the difference between the effects of a higher threshold and the LITO that I outlined above, the impact of these proposals will be to improve incentives to work for low income earners between $6,000 and $18,000 – where contrary to dot’s comments are where poverty traps are most relevant.

  32. Sinclair Davidson

    Peter – I NEVER once said anything about average tax rates. You have pulled this notion out of your arse and are now carrying on. Simply admit you misinterpreted what I meant. Tax rates are going up and EMTRs are going up too. If you don’t believe me believe an earlier version of yourself.

    The first tax rate over the new threshold rises from 15% to 19% and the second rate goes from 30% to 32.5% and then 33%. What this means is that the tax cut from the increase in the tax threshold is gradually offset by the higher rates, so people under $80,000 get a cut and those over have no change in their tax liability.

    Then you said (my emphasis)

    The increase in EMTrs is small and average tax rates do fall.

    After that both John Humphreys and I alerted you to the importance of marginal rates not average rates. Now you’re back again – I have been consistent all along in my emphasis on the rates going up and the EMTRs going up.

  33. JC

    Good point.

    Peter why are you so concerned with average rates when in fact what really is important are the marginal rates and how one’s income is treated?

    All people are concerned with is… their gross income and how the marginal rates end up in terms of what they are left with before and after.

    I would have thought it would be simple.. if you’re left with less than before, you will be paying more tax. Period. There’s no ifs no buts no nothing other than that end result.

  34. Richard Hayes

    “If you look, very carefully, you’ll notice that the tax rates for low income earners rises from 15 percent to 19 percent and the 30 percent rate rises to 33 percent. Now that is consistent with my claim that tax rates for low-income earners will rise.”

    However marginal tax rates for those low-income earners earning between 6001 and 18200 won’t rise, they will fall, won’t they? So tax rates (assume you mean marginal tax rates, makes sense in this context) will rise for some low income earners but will fall for others.

  35. Sinclair Davidson

    Tax rates are either going up or they are going down. Now 19 > 15 and 33 > 30. That suggests to my mind they are going, err, no, no don’t tell me, I know, I know, yes! they’re going up. That means more than what they were before. Not less than, MORE THAN.

  36. Richard Hayes

    Yes 19>15 and 33>30. However these are only the marginal tax rates for some low-income earners. For example for 10k earners they go from 15 to 0. 0<15. Which is less than, not more than, before.

  37. Sinclair Davidson

    Richard – the bottom tax rate is zero, the next is moving up from 15 to 19 percent and the next up from 30 to 33 percent. That is an increase in the tax rate – exactly what I said.

    You’re telling me that the composition of individuals facing the different rates will change. This is true – yet I have not said one word against that. In fact I said increasing the tax-free threshold was a good idea. So you’re countering an argument I didn’t make and don’t even disagree with. Peter Whiteford did exactly the same thing.

    If you want to argue please engage with the argument I actually made, not the one you think I made or should have made.

  38. Richard Hayes

    I am mostly responding to “Now that is consistent with my claim that tax rates for low-income earners will rise.” I assumed that you were making a point that the rise in these two tabulated rates meant a rise in marginal tax rates faced by low-income earners. So I thought this implied/said that the marginal tax rate faced by low-income earners would rise. And because of the change in threshold I don’t think the marginal tax rate faced by each low income earner will rise. For some it will decrease.

    If the statement was not about the marginal tax rates faced by low-income earners and instead was simply about the tax rates in the table, then that is fine except I would note that those rates are higher for everyone, not just low-income earners.

  39. Sinclair Davidson

    Richard the graph above shows that the EMTR rises from current levels. The table above shows that tax rates rise from current levels. Now we can debate whether someone earning less than $37,001 are low-income or not. I think they are.

  40. .

    You are now making the distinction between statutory rates and marginal rates, which you didn’t make in your original post on the Drum or in the post above.

    Now? He made it the day he posted this very article/post.

    It can’t be helped if people read articles and comment without paying attention.

  41. Richard Hayes

    I agree on the <$37,001 being low income. I am having trouble reading the graph, at the lower income end does it suggest that those earning ~16k to ~21K have a reduced Total EMTR between 2010-11 and 2012-13 while for ~21k to ~30k the Total EMTR rises? Or perhaps, confusingly, Total EMTR 2012-13 and Total EMTR 2010-2011 are not comparable.

  42. Sinclair Davidson

    Some people do benefit from the increase in the threshold. They now face zero percent as long as their income doesn’t rise – if it does they face 19 percent rates instead of 15 percent and, much higher EMTR’s they they would have before.

    Anyone above $21,000 is unambiguously worse off – facing higher EMTRs and higher rates. People between 16,000 and 21,000 look to be better off but for the overlap of the new statutory rate and the existing EMTR’s – I’m not sure what happens there.

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