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).