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:
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.