Flat Tax nonsense

Greg Jericho has an article over at The Drum arguing that a flat tax would only benefit the ‘wealthy’. It’s not clear if he means fabulously wealthy or just the run-of-the-mill wealthy, however, the non-wealthy (should that be the anti-wealthy) should never support a flat tax.

Okay – so what is his story?

Take, for example, a 35 per cent flat tax rate. It would see most people earning up to $170,000 paying more tax, and everyone who earns more paying a lot less:
jericho-flat-tax
And remember as well that using the ATO figures, only around 2 per cent of the population earn over more than $170,000, but they pay around 23 per cent of total income tax. Such a drop in tax would see well over $3 billion less paid in tax by the top 2 per cent. That’s a lot less revenue at the government’s disposal.

So the sleight of hand is in plain sight.

Take, for example, a 35 per cent flat tax rate.

Why 35 per cent? Well, it sounds reasonable and sensible. The top marginal rate is 45 per cent (plus the medicare levy). But observe carefully what is being done in the example. A 35 per cent average rate of taxation is being imposed on the population.* Everyone who currently pays less than 35 per cent on average will pay more tax under the flat tax – that is by construction given the example. Everyone who pays more than 35 per cent on average will pay more tax – again that is by construction given the example.

Any flat tax rate that is set above the overall average tax rate is likely to have this effect (it depends what you do about the tax-free rate). That is why flat-tax rate proposals always have a low tax rate and not a high tax rate. According to the latest ATO data (2009-10 – the new data is due any day) the average personal income tax rate was 22 per cent. Only the top 1 per cent of taxpayers in that year paid an average rate of personal income tax more than 35 per cent (41 per cent) the 99th percentile paid 33.9 per cent.

So by choosing a very high average tax rate Greg Jericho has engineered the result that he then claims is inherent in flat tax proposals.

* – It has occurred to me that this sentence isn’t as clear as it should be. What is happening is that everyone gets to pay 35% on every dollar above the tax-free rate. That number must be compared to the average rate that people pay now. As long as the flat tax rate is above the average rate being paid now, some taxpayers will end up pay more tax. The way to fix that is to fiddle with the tax free rate.

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61 Responses to Flat Tax nonsense

  1. JC

    Jericho comes from a couple of generations of APS taxeaters as he’s mentioned several times I believe.

    In other words there most likely has never been an individual in his family who could be called a producer. So no wonder he doesn’t like the idea of producers keeping more of their money. He along with other tax eaters wants it.

    So by choosing a very high average tax rate Greg Jericho has engineered the result that he then claims is inherent in flat tax proposals.

    How about this idea for a flat tax, Jericho? Zero income tax. That’s about as flat as you can get.

    Tax consumption not incomes you taxeating loon.

  2. Johno

    Sinclair

    Is the ATO data available online? If so, can you provide a link.

    I’ve gone searching for it in the past, but with no success. I’ve emailed the ATO but have not got a response. Why is that not a surprise!

  3. JC

    It would be good to get him to come here and explain exactly why he chose 35%.

    You there for an explanation, Jericho.

    Here’s another idea. There is no possible reason why an APS schelp should be talking to the rest of us about fucking tax. They should not even be voting let alone talking about how much to tax producers. Conflicted douchebags.

  4. Steve of Glasshouse

    When will the taxation vampires index rates to prevent bracket creep….

  5. Mark

    Sigh.

    Do I have to read it. I just ate and Jericho gives me gas. He is a boorish fellow at the best of times and continually sets up a straw man to knock around.

  6. hzhousewife

    Here’s another idea. There is no possible reason why an APS schelp should be talking to the rest of us about fucking tax. They should not even be voting let alone talking about how much to tax producers.

    Should elected politicians get a vote?

  7. Entropy

    Only for photo opportunities

  8. Alfonso

    what do i want? a 50% + gst and trifling income tax. when do I want it?. now. my mate keating understands and i’ll adopt a pensioner to pays its gst……..

  9. Tom

    Greg who? Jericho’s profile tells us he’s never worked anywhere or done anything — perfectly qualified as a $200-a-time ABC-endorsed parasite to lecture the working population about issues on which he has no disclosed expertise.

  10. Gab

    exactly why he chose 35%.

    Perhaps because state + federal tax to GDP is around 35%?

  11. Rabz

    Go easy Tom, he’s a former APS 1 file clerk of many years experience!

  12. Saw that a few weeks back when it was on his own site; I followed a link there from somewhere else.

    Its the sort of thing you roll your eyes at – hell of a lot of effort to misrepresent something.

  13. FDB

    Sinclair – are you seriously suggesting that flat tax proposals are generally advanced by people wanting the wealthy to pay more income tax?

  14. JC

    Sinclair – are you seriously suggesting that flat tax proposals are generally advanced by people wanting the wealthy to pay more income tax?

    Not generally so, but they ought to if they want to see more tax paid.

  15. JC

    Should elected politicians get a vote?

    Any APS’er should not be allowed as a candidate. Period.

  16. JC

    Fair is fair… This is actually a nice story about him. I hope he gets a lot of enjoyment from the cute little thing she appears to be.

    http://aww.ninemsn.com.au/article.aspx?id=8629624

  17. Sinclair Davidson

    FDB – good to see you back.

    I’m suggesting that flat tax proposals are advocated by people who want a better and less damaging tax regime.

  18. FDB

    Not generally so, but they ought to if they want to see more tax paid.

    So your (and Sinclair’s) problem with this notorious leftist Jericho’s flat tax analysis is that he’s presented a scenario that you, being broadly against progressive taxation, and being broadly against overall taxation, find favourable.

    OK.

  19. Mk50 of Brisbane

    Well I support a flat tax of 75% on all income of Greenfilth voters (yes, applied to welfare payments and their drug profits too). ALP voters are not so bad….

    ah, who am I kidding, nail those idiots too.

  20. john montgomery

    Hong Kong has an income tax rate of 16%. How. about 20% here and GST also at 20%. That’s it! The taxfree threshold should be set above benefit levels, but I think a minimum charge should apply. If you vote for more public spending, the minimum charge can be adjusted upwards.

  21. JC

    So your (and Sinclair’s) problem with this notorious leftist Jericho’s flat tax analysis is that he’s presented a scenario that you, being broadly against progressive taxation, and being broadly against overall taxation, find favourable.

    OK.

    You’re missing the point again dumbo. You generally find that when you lower the rates and flatten the tax more money goes into the coffers.

    But yes, I’m against progressive taxation because it’s totally immoral.

  22. FDB

    Sinclair – I’m going to try, even harder than last time, not to engage with the resident idiots. To limit my contributions to the subject matter, and conversations with people who show some semblance of willingness to understand what I’m saying. This brief metacomment notwithstanding of course.

    That and baiting JamesK, who is Worse Than Bird (trademark pending, all rights reserved).

    Incidentally, the reason I have decided to comment again is that you were kind enough to go to LP and offer consolations on the death of my kitty.

    Thanks for that.

  23. JC

    Hey FDB, what does the F stand for? Thanks.

    The reason I’m asking is that last time you were here I found you posting recipes on a cooking blog with all these other gals, but wasn’t able to find out what the F stood for.

  24. Jim Rose

    flat taxes are efficient taxes. efficient taxes lead to higher taxes.

  25. JC

    flat taxes are efficient taxes. efficient taxes lead to higher taxes.

    No tax on incomes is efficient. Minimal taxes should only be on consumption.

    Taxing incomes is both immoral and wrong headed.

  26. JC

    They are only there to placate the envy ridden.

  27. FDB

    Yes, JC. Everyone’s heard plenty about your identity expose vendetta.

    Do you think they find it interesting?

    I actually count you, some of the time, on some topics, as a person worth engaging with. You could tip the balance either way by either being, or not being, a total douchebag.

    I am not a “person of interest” in the community at large, as you presumably know from your extensive research. I’ve also never represented myself as anything other than I am online, barring my full name and contact details. I’m not sure what mileage you see in asking me such questions.

    But if you really went to town with your sleuthing, you would find the answer you seek. How much is your time worth? Only time will tell…

  28. Bob

    JC,

    If you want to see the result of “immorality” and “wrong headedness” visit French Polynesia or Noumea, where no income tax is paid.

    There you will find sky high prices for goods which the lowly paid or unemployed cannot afford.

    After your visit I doubt you will agree that taxing consumption alone is a good idea.

  29. JC

    It was an honest question, F?DB. No reason to get your panties in a knot.

  30. Gab

    I’m against progressive taxation

    Why? The “rich white people” and the “fabulously wealthy” are known to use roads 45% more than any other group. They use utilities and government services 45% more too.

  31. Sinclair Davidson

    FDB – my cat has been very annoyed with me. Since your story I’ve been taking the mice she catches off her so she doesn’t eat them.

  32. JC

    Bobster:

    I rather visit Hong Kong where there has been a flat tax in operation for evidence of it’s success than some third rate tin pot Frog colonies which I’m positive are all fucked up as a result of all the other shit the frogs get up to.

  33. wreckage

    offer consolations on the death of my kitty.

    Condolences from me too. I am a cat person, instinctively, from childhood, when we used to “kidnap” and raise feral kittens. Got a few scratches that way.

  34. wreckage

    A flat tax would presumably also include closing a massive amount of special-interest and lobby-group championed tax loopholes, and retaining a tax-free threshold.

    By which time it may well raise almost as much as progressive taxes whilst saving everyone a lot of time and angst.

  35. Mike a.

    The good thing about a flat tax is thats its hard to raise, but there would always be political gains in lowering the rate. At the moment any mild inflation causes bracket creep. Tax rises by stealth. With a glat tax the whole political dynamic would change.

  36. Rafe

    In addition to JC’s argument that progressive taxation is immoral on classical or traditional justice grounds (equal treatmemnt of all under non-discriminatory laws) the main case I would have thought is the deadweight cost of living with several linear metres of tax law. What are the ballpark estimates for that?

  37. big dumb fu

    There is much to be gained from a much more simple tax code that does not actively encourage those targeted to spend vast amounts of time and money gaming the system. Such a system would no longer reward the efforts made to minimise tax paid. A low, flat, equitable tax would also achieve a higher overall tax take for the government, and would reward effort rather than punish success like our current progressive system does. I’d expect further economic benefits to flow from such a policy.

  38. tbh

    That 35% flat tax argument is rubbish and as Sinc says, is designed to work backwards towards the authors pre-conceived conclusions. Why not make the the flat tax 20 or 25%? If we’re not going to completely flatten out the income tax rates, why not have the top marginal rate the same as the company tax rate (i.e. 30%)? And how about married filing jointly and indexing the brackets to the CPI while we’re at it.

    But really, the ideal world for me would be:

    – Flat income tax rate at say 20%
    – High threshold, so as not to disadvantage low income earners
    – Eliminate almost all deductions
    – Do away with tax returns completely
    – Remove incentives and loopholes in the tax code that make trusts and the like attractive
    – Means test the absolute living hell out of every government programme to make them cheaper to run (and thus remove the need for higher taxation)

  39. Rafe

    Of course the kind of people who measure the value of programs by the inputs (like Gonski) don’t know or care about deadweight costs.

    Some calculate the deadweight costs of implementing and operating the Gonski reforms. Sorry, off topic.

    I suppose the point is, where do you start talking about tax reform to people who don’t understand anything about productivity or the costs of doing business.

    That reminds me to do a post on the Business Council guy who gave a speech on productivity and why are we 25 on the productivity ladder.

  40. Entropy

    Wouldn’t a high threshold create a disincentive to earn more?

  41. Leigh Lowe

    Wouldn’t a high threshold create a disincentive to earn more?

    Any threshold creates disincentives at the margin, and promotes often irrational behaviours. A single threshold at least reduces this somewhat.

  42. Wow. Talk about starting with what you were supposed to prove. More of the Class Warfare bullshit. Can him, and seal the lid tight. It can all go out with the rest of the trash on September 15.

  43. J-man

    tbh, I agree with all your suggestions except the means testing of govt programmes. First, because administration costs would be higher with means testing then I recommend having none at all. That is, if the govt decides to give money to people for reason X then everyone gets it, irrespective of income. This addresses the issue of the morality of taxation and government expenditures. Second, if there is no means testing, politicians will think twice about adopting new expenditure as it will go to poor and rich alike.

  44. Harold

    Flat tax rate means you pay as you go and it’s correct at EOF. You’ve just gone a long way towards negating the need for tax returns.

  45. Tator

    FFFAAAAAAAAAAAAAAAAARrrrrrrrrrrrrrrrrrrkkkkk, it’s not only Jericho who doesn’t have a clue, a lot of them actually believe that the so called poor (basically the bottom 25% of income earners ) pay a higher percentage of their income in taxes or the poor subsidise the rich. Who is teaching them this crap, obviously not our favorite Cat Academics. These people are doing my head in since the Punch closed its page. Even with my basic knowledge of economics, I know better than that. I even spend time here lurking trying to learn more about things like Says law and other classical economics and I detest Keynsian theory as from what I have read, it is out of date with the advent of the global economy. On top of the poor economics, they are totally ignorant about the division of powers by the Constitution. Some stating that the Feds had the power to regulate consumer credit when up until 2008, the states regulated it. Others stating that Howard didn’t build any infrastructure when that is a state responsibility and the usual furphy that Dr Novak debunked about the states being starved of funds. The ALP talking points sheet gets around at the Drum along with the Greens nutters

  46. Nobody seems to think too much about the real issues. First of all it must be remembered the current tax rates become regressive after a certain level of income and very regressive at very high income levels because much income is derived from capital gains. Secondly there would be probably around a 1 to 2% drain on the economy due to compliance and formation of companies and trusts for no other purpose than reducing tax. Compound a 1% drain on an economy for 50 years and assume that half would have been invested instead of spent on lawyers, accountants and investment advisors and you will have very significant gains. The current system also encourages bad investment as it is designed to do by directing people to invest in what the government wants you to through different tax rates.

    Almost no one pays more than 25% of their entire domestic income consistantly in tax. Those who do would fit into groups like public servants and academics who can’t manage their own money. A flat rate of 30% being the company rate with a reasonable tax free threshold and a rate of 15% for capital gains longer than one year where there are no hoops to jump through to reduce it would lead to higher taxation and a collapse in work for lawyers, accountants and investment advisors whose entire job is to reduce tax. Super industry would be stuffed also, they only exist because of tax concessions and compulsion.

    Just to finish off my pet hate of paying tax twice due to earning money overseas through investment not work. Same system should apply to overseas income, pick a rate and everyone pays. I hate that people doing the same job as me with other people’s money don’t get taxed and I do.

  47. Jarrah

    Jericho quotes the Henry review:

    There are two core elements to a fair system – a progressive tax rate structure and an appropriate definition of income.

    Why is a progressive structure a core element of fairness? One common measure of fairness is equality. Surely everyone paying an equal proportion is very fair. As he notes in his article, the top 10% earn 30% of the total income, but pay 45% of total tax. How is that fair?

    An argument can be made that the wealthy have the ability to take advantage of more of the public goods made available by taxes, but I doubt it the ratio to income changes much at all as income increases, once you control for age etc.

  48. As he notes in his article, the top 10% earn 30% of the total income, but pay 45% of total tax. How is that fair?

    Jarrah maybe they do but they probably pay a lower rate than those in the 80 to 90% group who would earn a higher percentage of wage income and that is not fair either I would think.

  49. or I should say those who earn in the top 10 to 20%

  50. Jarrah, under a flat tax structure the poor would pay a higher proportion of their income in tax purely because income tax would not be the only form of taxation.

    GST, sales tax, excise etc hit the poor harder than the rich, therefore if you plan on persistint with those taxes then income tax needs some degree of progressiveness to be fair.

  51. Driftforge

    A flat tax is a step towards no income tax. A good first step towards a necessary goal. Once you make the argument that in is not fair for income tax rates to vary, you are on the way to making the argument that income taxes are inherently wrong.

    The state should tax the state, not the people therein; only then do you remove the coercive nature of taxation.

  52. Wayneofperth

    Everyone who pays more than 35 per cent on average will pay more tax

    Less?

  53. south

    I think the GST satisfies most people’s idea of progressive taxation because rich people “tend to buy more expensive stuff” and thus pay more.

    In Australia, policies are judged more on their intent than their actual outcome, so as long as it looks like you’re doing the right thing it’s OK. A flat tax just ‘looks unfair’ to most people so that’s why we won’t get one.

  54. FDB

    I think the GST satisfies most people’s idea of progressive taxation because rich people “tend to buy more expensive stuff” and thus pay more.

    If by “most people” you mean people who aren’t too bright, then maybe.

    Yobbo – wouldn’t a flat tax only tax income above a certain threshold? So a person under the threshold pays none, a person just over it very little, etc etc

  55. Yobbo – wouldn’t a flat tax only tax income above a certain threshold? So a person under the threshold pays none, a person just over it very little, etc etc

    I think most flat taxes are envisaged with no threshold, but end up having one later for political reasons.

    One of the strongest features of a flat tax is that it takes away the disincentives to produce at the bracket margins. Having a threshold spoils that somewhat.

  56. Rod Clarke

    My Preference
    – Flat income tax rate at 20% (i.e. everyone works 1 day and one day only per week for the government)
    – 20% Consumption tax
    – 20% Company and CGT rates
    – No threshold, but all given a Consumption tax credit for all consumption up to the poverty line. (i.e the pmt is the same for everyone so you only pay for tax on Consumption over the ppoverty line)
    – No deductions
    – No tax returns no ATO thus freeing up thousands and thousands of smart workers (in Government and in Accounting / tax practices to get into the productive economy)
    – Every government programme charge something for its services at least partially exposing the governments “products and services” to market discipline.

  57. A flat tax just ‘looks unfair’ to most people so that’s why we won’t get one.

    south
    When compared to what? If the current system looks fair then people need their heads read. The reason we are unlikely to get a better tax system is that who is going to actually lobby for that? I can’t remember who said it but one of the people who post articles here said “here at the cat we do not support increases in taxation under any circumstances” . Using either right or left wing arguments this means that you can’t have a flat tax or a simple tax system etc. because the group at the cat apparently (Except maybe SamuelJ) would never be willing to put up a tax rate from 0 or remove any stupid deductions etc. etc. So keep the status quo no matter how stupid so no one ends up paying more tax. Overall reduction and simplification in taxation is a good idea but who would be willing to do it?

  58. JJP

    Sinclair, I’m a bit late on the draw here but I wanted to ask your opinion on the efficacy of a negative income tax regime.

    http://en.wikipedia.org/wiki/Negative_income_tax

  59. wreckage

    The reason we are unlikely to get a better tax system is that who is going to actually lobby for that?

    Bingo, but you’re wide of the mark pointing the finger at the Cat. Hardly a swinging dick of political influence.

  60. Wreckage I think that the people here are like others and number one rule appears to be that no one can be worse off which will almost always make everyone collectively worse off. Need a politician or political group that can deliberately make some worse off even in the case of reducing overall taxation. We currently have 2 income tax acts the second was made in 1997 and was to slowly replace the income tax act of 1936. So guess what we now have 2 income tax acts and the 1936 one is still being added to. Maybe we will just create another income tax act when the second one gets a bit big. Note the date this is bi-partisan.

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