May 01, 2014

Horse 1665 - Shock; Horror! 1% And 2% Tax Rise! Run For The Hills!

Mayday! Mayday! Mayday!
There is a lion in the road! There is a lion in the streets!

We'll all be murdered in our beds!

I like to pay taxes. With them I buy civilization.
- Oliver Wendell Holmes, Jr.

Isn't the media strange? I bet that for the period between 2001-2012 when Australia had a period of 10 years of tax cuts in 12 years, no-one said 'boo'. Yet the second that a government tries to move one step in correcting this, the media cries foul, flaggelates itself, chucks a hissy fit and has a sulk.
The Daily Telegraph, The Sydney Morning Herald, The Age, The Australian and even The Guardian were all guilty of this and collectively, looking at the the Australian press is like watching a room full of three year olds having a temper tantrum competition.
The Guardian was the least like a three year old though and the tone of this sounded more like a grumpy teenager.
Now that the prime minister has confirmed the government is considering a “debt levy” and Sydney’s Daily Telegraph is telling us it is likely to be 1% for those earning between $80,000 and $180,000 and 2% for those earning over $180,000 it is possible to calculate the extent to which Australian voters may have been duped.
Tony Abbott spent four years in a hi-vis vest telling us over and over about the “almost unimaginable” hit on families’ cost of living from the carbon tax and how the average household would be $550 a year better off when he “axed the tax”. He somehow forgot to mention another tax that for many families would take all, or most, of that money away again.
- The Guardian, 29th Apr 2014

Oh for goodness sake. Grow up. This only affects those people who already earn at least 107% of average income. In practice, the distribution of incomes in Australia is skewed anyway; so at least more than 50% of the population will remain completely unaffected.
This is one of those rare occasions where I find myself agreeing with the PM Tony Abbott. His reasoning as far as I can make out is completely sensible and pragmatic.

"I think if there was a permanent increase in taxation that would certainly be inconsistent with the sort of things that were said before the election.
There's been speculation, as you know, about a deficit reduction levy. Certainly, my intention is that people like myself - high-income earners - should bear a significant quantum of the burden when it comes to sorting out our problems."
- PM Tony Abbott, on 3AW, 29th Apr 2014

A "debt levy"is it? Oh tish. It's an income tax rise. It isn't like we have never had changes in taxation rates before. Income tax rates have changed a lot since the introduction of the Income Tax Assessment Act of 1936. Why is this particularly strange or weird?

All that happens is that the posted tax rates shift from:
0 – $18,200 - Nil
$18,201 – $37,000 - 19c for each $1 over $18,200
$37,001 – $80,000 - $3,572 plus 32.5c for each $1 over $37,000
$80,001 – $180,000 - $17,547 plus 37c for each $1 over $80,000
$180,001 and over - $54,547 plus 45c for each $1 over $180,000

To the following:
0 – $18,200 - Nil
$18,201 – $37,000 - 19c for each $1 over $18,200
$37,001 – $80,000 - $3,572 plus 32.5c for each $1 over $37,000
$80,001 – $180,000 - $17,547 plus 38c for each $1 over $80,000
$180,001 and over - $55,547 plus 47c for each $1 over $180,000

The last time that we saw a 47% tax rate in Australia was the 2005–06 financial year. Even then, the actual brackets themselves weren't this generous. Do you want to see a flood of fear? Travel back in time to the year 1983–84 and we find a 60% tax bracket and that was when real wages for most people were higher than they are now.

"Let’s take a single income family with a couple of kids on $150,000 a year. Under the detailed calculations Labor provided with its carbon tax plan, they would have paid around $760 a year in extra bills as the tax flowed through at its original $23 price, and would have received $77 in compensation, leaving them $683 a year worse off.
Or take a dual income family with kids where both parents earn $100,000 a year. They didn’t get any compensation under the carbon tax and – according to the former government’s tables – wound up $1,000 a year worse off. Under the debt levy they’d be paying $2,000."
- The Guardian, 29th Apr 2014

Yes, how about we do take a single income family with a couple of kids on $150,000 a year. According to the Australian Taxation Office's Average Weekly Ordinary Time Earnings (AWOTE) figures (which by the way work out to be $74,724), this single income family with a couple of kids earns more than double the amount of average income. Why pray tell shouldn't they shoulder more of the burden of debt than someone on less than half of that?


I've written previously on the subject of why progressive taxation is inherently a good thing before (see Horse 1218) but quite apart from that, someone on $150,000 year actually benefited more from the 10 years of tax cuts in 12 years more than someone on AWOTE could have ever have done. At no point did I ever hear anyone complain about that.
Unlike the United States, Joint Tax Returns do not exist. In Australia, married persons are taxed separately on their respective incomes and must lodge individual returns. As a consequence, they are assessed separately and already derive the benefit from the tax-free threshold twice. Two people who together earn $200,000, "save" $13,653 than had this amount been aggregated; admittedly though, there probably would be a different set of taxation rates if Joint Tax Returns did exist but I really don't know how far down the rabbit hole we wish to go.
Also, if you can't honestly manage your finances on more than double AWOTE, you have serious self-discipline problems. Someone on that sort of money is in no way struggling financially at all and to pretend so, is a lie.

Anyone who was part way in the know, or who had MYEFO or who had a vague idea of the news cycle knew that the Liberal Party had been flagging some sort of structural changes in the budget and since raising the GST is fraught with political turmoil, really all that was left was to undo the previous tax cuts a little:
Having beaten up the ALP about what an emergency/crisis/disaster they have left, the most difficult part of the Government's fiscal challenge is not to prepare the nation for tax increases and spending cuts next year, but for the lack of them.
These are big cuts to the personal income tax base that now look irresponsible in the light of 10 years of projected deficits because of the decline in the terms of trade.
And while increasing the rate of GST and/or closing its holes should not be off the table, doing that would hit poor people the hardest. Increasing income taxes - gradually, over time - would raise more money and be fairer.
- Alan Kohler, ABC, 18th Dec 2013

Mind you, six months before this, the Australia Institute which is an independent think-tank was already playing with calculations and had come to the conclusion that income tax cuts probably shouldn't have taken place at all:
If the budget is in deficit because of income tax cuts that primarily benefited the highest income earners and that is being used as a reason not to give more money or support to the poor and disadvantaged, then political debate in Australia has reached a new low. 
Using NATSEM modelling, the full extent of the tax cuts was determined by calculating the amount of revenue the government would have collected had the income tax cuts from 2005-06 to 2011-12 not taken place. These tax cuts represent a major structural change to the federal budget. In 2011-12 they slashed the amount of income tax the federal government was able to collect by a quarter.
- "Tax cuts that broke the budget", The Australia Institute, May 2013

This is one of those occasions where I'm not going to engage in paraleipsis and say "I hate to say I told you so" because I really really love to say it. Is it plagerism if you quote yourself? I told you so.

The budget currently suffers from a major skew, caused by previous horrendous tax cuts and no government has bothered to correct the problem. The solution is not tax cuts but a restoration of revenues; which means tax increases. Obviously there's a revenue problem here.
Mr Hockey won't of course tell you this of course. He can't. It would hurt the ears of his own electorate to hear it.
- Horse 1582, 18th Dec 2013

I think that Mr Abbott and Mr Hockey have stared long and hard into the gun barrel of history and decided that it's now pointing squarely at them. Tax increases, even at marginal rates of 1% and 2% really do hurt the ears of their own electorates to hear but really, this is a story which needed to be told and was so far ahead in the telling, that it makes you wonder at just how much attention people actually do pay to what's going on.
Probably nil. The media likes to chuck a hissy fit and have a sulk. It sells copy.

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