Silliness on taxation

I think there are two Adam Creighton’s. One is very sensible … and the other writes a lot of nonsense about banks and taxation.  Today we got an article on taxation. The very short version is that we should all pay more tax because high-income earners are coke-heads and cocaine imports into Australia show that everyone has far too much money.

Here is the paragraph I want to discuss.

That’s even before you consider the significant argument that someone on $200,000, especially if they are supporting a family, will notice $1000 much more than someone on $800,000. That they pay the same marginal rate in Australia is an insult.

Sigh. To be fair – lots of people make this mistake. Applying diminishing marginal utility to money is a mistake. It is true that you should get less utility from consuming your 20th burger than you did your first. But it isn’t clear that you will get less utility from spending your 20th dollar than you did your first. That is because money is fungible. Even if you got tired of spending your own money on yourself, or on others – depending on your preferences – you could store your money until you felt like spending it again. Both Samuelson and Hayek argue that while diminishing marginal utility was employed as an argument to introduce the graduated progressive income that this argument is wrong.

Then Adam leaves unexplained why people on $200,000 and $800,000 paying the same marginal rate of tax is an insult. To whom? Why? Modern economists often talk about horizontal and vertical equity. People who are the same should be taxed the same and people who are different should be taxed differently. As best I can determine these ideas can be traced back to JS Mill.  Sounds all very sensible – but the devil is in the detail.

Determining that some people are different and as such should be taxed differently is morally problematic. In liberal democracies we tell ourselves that everyone is equal before the law. We pass laws to ensure that equality. We employ bureaucrats to enforce that equality. Those bureaucrats increasingly hunt down and persecute anyone who speaks out against equality at any or every margin. Yet not when it comes to taxation – people are crudely classified as being different and subject to different rates of taxation.

So a flat rate of tax is the only moral form of taxation that is consistent with equality before the law. Now perhaps 49% is a tad too high – but the principle is sound. It is possible to introduce progressive taxation by combining a flat rate with an income threshold if that is what people want.

The important thing is that while individuals on $200,000 and $800,000 might pay the same rate of tax, they pay very different amounts of tax. According to the ATO simple tax calculator  an individual on $200,000 would have paid $63,232 in personal income tax (31.6% on average), while the individual on $800,000 would pay $333,232 in personal income tax (41.7% on average).

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41 Responses to Silliness on taxation

  1. Pyrmonter

    Creighton is paywalled; this isn’t (up to an article limit); is he channeling the Krug?

    https://www.nytimes.com/2019/01/05/opinion/alexandria-ocasio-cortez-tax-policy-dance.html

  2. Infidel Tiger

    Creighton makes some good points.

    Single people should be dealt with very harshly under tax law.

    Families should be treated very generously.

  3. John Barr

    The problem comes when those on the highest incomes reduce their Taxable Income to almost Zero. They employ very smart Lawyers who exploit every conceivable loop hole. Something that the lowest Income earner cannot do.
    Therfore; There should be a Flat Tax of 10% on Gross Earnings from all sources & no Deductions for any reason. Any money that leaves Australia, by an individual or Company, for Tax Havens must be charged at double the Rate, 20% before it leaves the Country.
    That I see as a fairer System.

  4. kc

    The very fact Creighton manages to pass himself off as an ecomics journo says more about the MSM than anything. Cretin, not Creighton.

  5. Rafe Champion

    Lets have tax equality. Flat tax.

  6. feelthebern

    If someone wants to be single & spend all their $$ on guns & ammo while watching porn, why should they be penalised more than a guy who is married & spends all their $$ on guns & ammo while watching porn.

  7. Rafe Champion

    People with capacity for discretionary spending will mostly spend or invest which benefits other people anyway so it is not inherently anti-social.

  8. Stimpson J. Cat

    we should all pay more tax because high-income earners are coke-heads and cocaine imports into Australia show that everyone has far too much money.

    Cough…. Traders… Cough Cough… ..
    😁

  9. JohnA

    kc #2902549, posted on January 9, 2019 at 4:36 pm

    an ecomics journo

    A serendipitous slip, maybe? 🙂

  10. Stimpson J. Cat

    Families should be treated very generously.

    Define “Family”.

    😁

  11. Rafe Champion

    When i was married with children i had no money for guns and ammo and no time to wstch porn. Now that is REALLY unfair.

  12. Infidel Tiger

    If someone wants to be single & spend all their $$ on guns & ammo while watching porn, why should they be penalised more than a guy who is married & spends all their $$ on guns & ammo while watching porn.

    Our future literally depends on punishing single people.

    They are drains on society and must be brutally dealt with.

    A bit of harsh tax treatment might get these wastrels and incels doing the right thing.

  13. Infidel Tiger

    People with capacity for discretionary spending will mostly spend or invest which benefits other people anyway so it is not inherently anti-social.

    Cocaine, pornography and video games is hardly going to make society better.

    Only the harsh stick of punitive taxation can show them the error of their ways.

  14. Tim Neilson

    The problem comes when those on the highest incomes reduce their Taxable Income to almost Zero.

    Did you have any examples in mind?

    Or is this just another “progressive” meme like CAGW?

  15. Mother Lode

    Those bureaucrats increasingly hunt down and persecute anyone who speaks out against equality at any or every margin. Yet not when it comes to taxation – people are crudely classified as being different and subject to different rates of taxation.

    Slight error here: the will persecute anyone arguing against equality of outcomes.

    They would be fine with a taxation system that reduced the income of someone on $800,000 to that of someone on $100,000.

    In principle.

    In actuality they would believe that a person starting out with $800,000 was somehow morally inferior to a person on 100,000 and would be content to see a punitive regime that taxed them further.

    Also they would believe that they ought to be exempt from such rigorous treatment because they are morally superior.

  16. New Chum

    The Labor party and their mates the Greens will find a way to put their hand into your pocket if the Liberals and Nationals don’t get there first. As a self funded retired person I receive franking credits which will be taxed as income under Labor (as they are now) and after tax and medicare is payed Labor will take the rest.
    100% tax.

  17. Bruce in WA

    Some of the comments there are … vigorous!

    Rob
    1 HOUR AGO
    (Edited)
    I think the risk, Adam, of dumbing things down to the level you imagine the average reader is at, is that you come off looking less than smart yourself. Your graph is the first thing that appears in the article. It’s glaringly wrong for two reasons:

    Firstly, the top tax rate numbers are obviously nonsensical – the top rate has never been below $0.45c in my living memory and thats without considering medicare and other levies.

    Secondly, its is near pointless to plot the top tax rate against government revenue as a proportion of GDP as the correlation between top rate and total tax revenue is tenuous at best. Perhaps showing the historical multiplier of AWOTE where the top rate kicks in would have provided some much-needed support for the article. Better yet, showing the average tax paid by income quintile over time.

    And it doesn’t get any better from there. Not one of the numbers in your first paragraph matches the graph.

    As for the allusion to high income earners being cocaine users or that we’re starved of good teachers because they’re money-grubbing oligopolists… well that’s just juvenile, frankly.

    Likedthumb_up5
    Replyreply

    Robert
    1 HOUR AGO
    I would invite the doubters here on this blog site (and there is certainly no shortage of them) to read another excellent article on this subject written recently by the Nobel Prize winning economist Paul Krugman in the New York Times. This can be found at

    https://www.nytimes.com/2019/01/05/opinion/alexandria-ocasio-cortez-tax-policy-dance.html?emc=edit_th_190106&nl=todaysheadlines&nlid=603414980106

    This low tax, privatize everything in sight, small government, neo-liberal poison that has had such a toxic effect on not only our economy but our very society, needs to change and change radically and to do so soon.

    Adam’s excellent article is a step in the right direction.
    Robert Reynolds

    Stephanie
    3 HOURS AGO
    D grade economist. Surely the Australian can get someone with skills to comment on tax etc
    Likethumb_up4
    Replyreply

    Robert
    4 HOURS AGO
    Usual socialist tosh from a former RBA economist .
    Likethumb_up12
    Replyreply

    Richard
    4 HOURS AGO
    Good work Adam, one of your best yet.
    Likethumb_up3
    Replyreply

  18. Dr Fred Lenino

    Rafe Champion the name Chmpion. There used to be a pub in Fitzroy Melbourne called “the Chamion Hotel” on the corner of Brunswick and Gertrude streets it was a real rough joint ,one to keep away from . It died when the slums there were cleared ,and their clientele moved to the outer suburbs . Just to show you have a claim to fame in Melbourne.

  19. IainC

    (I submitted this as a comment to the aforementioned article, and it was rejected until I deleted the last sentence).
    Unfairly high tax rates lead, as exactly the case in the UK in the seventies, to either tax exiles in the case of high net worth entrepreneurs (bad for the local economy) or salary inflation for corporate functionaries (“I want to take home 1 million clear, so I need to be paid 3 million before tax”). The axiomatic premise should be that the government starts with zero dollars and needs to justify every cent it takes from you thereafter. Anything up to 20% of GDP should be easy, and they need to work harder after that. A taxation scheme that takes more that 25% of your total income (ie the Federal Government’s GDP ratio revenue level) is unfair and needs to be comprehensively justified. Government needs to prove it is optimising tax spending before it asks for more revenue from captive milchcows.
    The cocaine-tax argument is the worst I have ever seen in this paper, and that’s one that publishes Philip Adams.

  20. David Brewer

    Krugman is right to some extent when he emphasises the importance of incentive effects.

    But it’s hard to believe his claim, based on others’ work, that optimum revenue can be gained from a 70 or 80 per cent marginal rate. With the labour and capital mobility in the world today, any country that introduced such rates would see its entrepreneurs vanish in double-quick time, with growth-crashing results.

    Krugman, and Creighton apparently, also ignore the incentive effects lower down the income scale. I don’t know about you but I find any tax rate over 40 per cent quite dissuasive. Once it’s over 50 per cent surely anyone is going to look for ways out.

    Krugman’s graph apparently showing a positive correlation between high top marginal tax rates and high economic growth is misleading in at least two ways – he has left out earlier periods when the opposite was the case, and he takes total growth instead of per capita growth, thus overstating the fall in growth per head over the last 40 years when top marginal rates have come down.

    See our man in Washington on soaking the rich. Plenty of counter-evidence to Krug and Creighton there.

  21. Squirrel

    Fretting and obsessing about tax rates for people with high assessable incomes compared to people with very high assessable incomes is symptomatic of a centre-right political discourse which is hideously out of touch with the concerns of the people who are going to decide who gets to govern the nation for (at least) the next three years.

    Focus on the fact that the effective marginal tax rate of 36% (income tax + Medicare levy + withdrawal of LITO) kicks in at $37,000 p.a. and you might begin to understand why Shorten (who has cleverly cherry-picked aspects of the “forgotten people” theme) is currently on course for one of the biggest federal Labor victories ever.

  22. Tombell

    Creighton’s “analysis” is predicated on the view that someone on $800k is “rich” and therefore properly subject to more fiscal confiscation. But you can say the same about someone on $200k compared to most wage and salary earners. But penalising the rich is old hat. But as they say in debating, first define your terms. Who is rich? The Labor party puts up various figures which means your rich and deserve to be hit. Used to be $50k once from memory. Now it’s $80k or so. The view that if you’re on $800k you don’t pay tax because you can afford lawyers and accountants is bunkum. Sure you can invest in things and claim a deduction. Negative gearing in property anyone? In the good old days you could even invest in films and get 130% deductions. Maybe more. And the Commonwealth had an infrastructure bond of sorts too. So yes your taxable was down but guess what so was your disposable. And presumably the Mandarins thought your hard earned was going to a good cause. I agree a flat tax with maybe a tax free threshold is the go. Although to be blunt I think everyone including welfare recipients should be clipped something. How else to remind people that Medicare is not “ free”.

  23. Mr Creighton’s egregious suggestion that higher income earners are wasting surplus (ie, retained) money on cocaine consumption is offensive and stupid in equal measure.

    Richo made a similar claim in a column a while back where he suggested that high income earners routinely dropped $15,000 on ritzy lunches.

    I suppose consumption patterns could be different in the circles I don’t move in.

    Most high income earners I know are sober and hard-working middle aged (or older) professionals who are finally enjoying the fruits of long years of study and toil. They are mostly family orientated people and spend their money on boring items like the education of their children or investments for their retirement.

    None of them wear striped trousers or a top hat either – at least as far as I can recall.

  24. Deplorable

    Although to be blunt I think everyone including welfare recipients should be clipped something. How else to remind people that Medicare is not “ free”.

    Actually everyone is clipped with GST except those who can hide some private expenses in business expenses and get the refund. Stamp duty on all insurance , property transactions plus whatever else they clip the ordinary person for. When you look at the add on taxes that low income earners like teachers and other even lower income earners pay on top of the average tax rate plus medicare the story becomes more cloudy especially if single no kids. I am yet to discover that the bank CEO on $10 million or the surgeon on $1 million plus actually pay the same percentage of their total incomes to governments as do those on much lower incomes.

  25. sabena

    Creighton claimed the authority of Menzies for suggesting a higher tax rate-but that is entirely meaningless until you compare the percentage of revenue raised taking into account all rates.For taxation there is undoubtedly a most efficient tax rate,just like in transport with a most efficient speed(ie the furthest distance in the shortest time at the lowest cost).If cats readers can suggest what this is,I’ll be obliged.

  26. HGS

    John Barr

    “There should be a Flat Tax of 10% on Gross Earnings from all sources & no Deductions for any reason. Any money that leaves Australia, by an individual or Company, for Tax Havens must be charged at double the Rate, 20% before it leaves the Country.”

    A flat rate of 10% would see people bringing money to Aust not leaving.

  27. Terry

    sabena
    #2902774, posted on January 9, 2019 at 7:54 pm

    “For taxation there is undoubtedly a most efficient tax rate,just like in transport with a most efficient speed(ie the furthest distance in the shortest time at the lowest cost).”

    The Laffer Curve is probably just as good a place as any to start with this concept.

  28. None

    I have a love-hate relationship with Adam Creighton as well. Today it was hate. You should write this up for a column in response and submit it to the Oz, Sinc. You can demolish him in less than 500 words.

  29. None

    The cocaine-tax argument is the worst I have ever seen in this paper, and that’s one that publishes Philip Adams

    Best sentence of the lot.

  30. None

    The one tax I simply just don’t understand and hate above all else is stamp duty. What the f*** is stamp duty.

  31. Anon

    Just as a point of accuracy:

    $200k – $300k p.a range earners face significantly HIGHER effective marginal tax rates on the next dollar than $800k p.a earners.

    This is due to the phase out in that range of a great many government structures (net taxes). Including for example:
    Division 293 for super
    Private health rebates
    Various family benefits welfare programs
    Childcare subsidies

    Depending on personal circumstances, the EMTR could be as high as 80-85% at various income levels in that range. Above $300k everything is fully phased out and the marginal tax dollar is back to the ‘headline’ high 40’s level.

  32. Tezza

    Add superannuation to the topics on which Creighton is deranged.

  33. Infidel Tiger

    Creighton is spot on that super is a huge scam and a financial disaster that has ripped all but the wealthiest off.

  34. RobK

    Well said Sinc,
    And then there’s staged payroll tax as well, a real incentive on top of clipped wages to spread the burden of production.

  35. Terry

    Tombell
    #2902720, posted on January 9, 2019 at 6:49 pm

    “Although to be blunt I think everyone including welfare recipients should be clipped something.”

    Yes. Absolutely.

    I’d go further and say the same rate of taxation as well.

    There should be no way in which any group can vote for another group to have their tax burden increased in order to receive a reduced tax burden themselves and/or greater largesse from the public coffers.

    You vote for higher taxes, you’re wearing it too.

    Watch the level of taxation drop once voters have to wear the consequences of their “decisions”.

  36. Petros

    Can we stop using the term progressive when it comes to incremental income tax brackets please? It is more like vindictive taxation. Another point, the high tax payers are generally not the same people as the wealthiest individuals in Australia.

  37. duncanm

    None
    #2902891, posted on January 9, 2019 at 10:02 pm
    The one tax I simply just don’t understand and hate above all else is stamp duty. What the f*** is stamp duty.

    the state tax that went away with GST….

    … oh, wait.

  38. Andre Lewis

    Governments tax individuals on the basis that benefits they receive, infrastructure, public safety etc, have to be paid for. But one individual gets no more of these benefits than anyone else so a taxation system that levies virtually nothing on one person and a significant proportion of income on another is patently unfair. No matter what political dogma is used to justify this it is unfair in strict terms. The taxation system is also manifestly too complex so, as some commenting here have advocated, a flat tax plus a consumption tax – maybe higher than the current GST – should support reasonable government expenditure and tax more equitably.Of course, reasonable government expenditure does not include renewable energy subsidies, useless overpriced submarines, foreign aid to corrupt nations and so on.

  39. Alex Davidson

    I don’t understand how a so-called ‘flat tax’ can be considered any more moral than the punitive system we have now. Both judge their victims as unequal before plundering them; only one more so than the other. If equality is the goal, then surely the only moral form of taxation would be a fixed annual monetary amount per person.

    However the far greater issue is that of taxation itself. How can we expect to create a moral and just society when one group – the political class – is permitted to use force to achieve their ends, while the rest of us are not? What sort of message does that glaring double standard send out?

    We should be advocating a society based on contract, consent, and respect for property rights. Taxation violates those principles utterly. There is no sound reason why many of the ‘services’ currently forced on us by the political class could not be supplied by entrepreneurs to those who wanted them. Education and health for starters.

  40. Kneel

    Flat tax sounds good – just put the tax free threshold at the rate of the dole. Obviously, the govt has determined that the dole is enough to survive on and not much (if any) more. Therefore, taxing anyone who earns less than the dole (and therefore, less than survival wages) is immoral – same argument as no GST on food.
    Corporate and individual tax rates should be the same, buys vs lease for company should be treated the same etc etc. If ignorance of the law is no excuse, then we are all f*cked – when even a trained lawyer says “you need a specialist tax lawyer, not me”, the system is overly complex and therefore ripe for rorts, rip-offs and crony capitalism.
    In my view, no-one likes paying tax and everyone thinks someone else should pay more, just because “I’m struggling here!” or whatever. So go flat, no deductions – looks fair because it IS! Tax free threshold assists the poor without significant impact on the “rich”, everyone knows you are paying exactly what they would, regardless of how smart your accountant is.

  41. urb

    None
    #2902891, posted on January 9, 2019 at 10:02 pm

    ‘a duty levied on the legal recognition of certain documents’

    legal fairy fee

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