We cannot afford to have a tax burden that stifles growth and costs jobs. We can’t just view the tax system and taxpayers as a collection pool of unlimited funds. So in developing a better tax system, we need to consider the sustainability of our heavy reliance on income tax, especially personal income tax. This is because we need to take into consideration the negative impact and disincentive of higher taxes.
The problem is we have an over-reliance on personal income tax to support our revenue base. Our largest source of tax revenue is personal income tax. It raised about $185 billion last year.
- Joe Hockey, in The Australian, 10th Aug 2015.
On Monday, Treasurer Joe Hockey was given an opinion piece in The Australian. Now whilst in principle I have no problem with someone being free to express their opinion and be paid for the expression of that opinion, I wonder why he took his opinion firstly to The Australian and not the ABC.
The Prime Minister thought it was a problem when "the national broadcaster appears to take everyone's side but our own" in January of 2014 and I would have thought that if government officials wanted to show that they were on "Team Australia" that they would have "at least some basic affection for the home team, so to speak". Which is "the home team"? If The Australian is the doyenne of a subsidiary of an American multinational mass media company, just who is the "home team" here?
A man much wiser than me once said that "where your treasure lies, your heart will lie also"; from the world of accounting we're told that if you want to find motives, follow the money. It is telling therefore that when Treasurer Joe Hockey writes a piece talking about income tax policy, he does so in The Australian and not on the ABC's website.
Even within the News Corp Australia group, he does so in The Australian and not the Herald-Sun, the Daily Telegraph or the Courier-Mail. This is a piece which from the outset plays to an audience and definitely has them in mind. This is a "discussion" around income taxation policy, knowing that the great unwashed, illiterate masses will not be privy to it. Follow the money; find out where this treasure lies; who he is playing to.
That aside, I find two broad things interesting about Mr Hockey's article.
Firstly he starts with the premise that government revenues have and over-reliance on personal income tax supporting the revenue base.The article then tries to prosecute the case as to why he thinks that income taxes are inherently too high.
Given that in the 2015 budget the projected revenues expected to be collected from Individual Income Tax is $189.6bn and the single largest component of the income side of the budget, it seems strange to me that you'd want to castigate Income Tax itself.
"Our top marginal tax rate is higher than the OECD average and relatively high by international standards."
This is technically correct which is the best kind of correct but in one sentence, this statement is misrepresentative.
The OECD is made up of 34 countries; some are vastly different to others. Australia's top marginal tax rate of 45% might be worth comparing to other industrialised nations like the UK, France or Germany which also have a top marginal tax rate of 45% but is it fair to compare Australia to a nation like the Czech Republic whose top marginal tax rate is only 15% or Switzerland which is a virtual tax haven at 11.5%.¹
"Our personal income tax revenue is subject to unsustainable risk. For example, the top 10 per cent of individual taxpayers pay nearly half the personal income tax collected by the government."
If I was going to design the perfect taxation system, I would want the total taxation base to map perfectly to the total income base. Unfortunately, there is a degree of impossibility about that. Income tax concessions are usually given to the very bottom tier of society because the poorest people in the country are often squeezing pennies so hard that they begin to yell (both the people and the pennies).
When collecting statistics, there's always a bit of lag and so I don't have current figures. In 2011-12, the 1.8 million people in the top 10 per cent of individual taxpayers accounted for nearly 29% of total income. To be in that top 10% you needed to have earnt at least $88,102 when AWOTE was $68,775. Currently, AWOTE is $77,194; so in proportion that top 10% should now be earning at least $98,886. The thing is though, at an income of $98,886 you're not exactly doing badly.
In 2015-16, exactly what is the income share of the top 10 per cent of individual taxpayers? If the bottom say 40% include people who have income diverted to them with the express purpose of avoiding taxation, then maybe it is fair to recoup some of the lost taxation from the people who made those decisions to avoid tax. I deal with instruments such as Trusts and Superannuation Funds and advice clients to make those decisions. Tax avoidance is not and has never been illegal. What I'm suggesting is that there could be a distortion of taxation statistics as part prudent financial planning.
There is a generally accepted principle that if you work harder, then you should accrue greater rewards for that work. We like the idea that the economy is somehow this virtuous entity which apportions its rewards upon the hardest working of society and does not reward the lazy. Whilst that might be true in a theoretical economy where everyone's labour is valued identically, that simply is not the case in the world we live in. Quite often the cleaners of a building work horrible hours and are treated horribly by horrible people for equally horrible pay. If the rewards for work were truly awarded to those people who work the hardest, then cleaners would be paid far more than they are. They are not.
If it isn't the laboriousness of work which is rewarded, then is work rewarded upon the basis of skill? Clearly that is not the cases either, since teachers are not paid more than people in management and neither are people like research scientists. The real rewards to be found in the economy are things like corporate management, financial management, the legal profession and an extremely small slice of the entertainment and sports industries.
The awful truth that no-one likes to admit is that doing work and the rewards for work were decoupled a long long time ago; yet the myth still persists because those people who are paid a premium also tend to hold more of the power in deciding what the rewards for work shall be.
The other thing that really bothers me in this discussion is the annoying fact that ever since about 1975, the rewards for holding capital (which mostly entitles someone to derive benefits from other people's work) have been growing in real terms at higher rates than the rewards doing work in the first place. Returns on capital have generally kept ahead of inflation whereas real wages in many instances have not.
This being apparent by observation, you'd think that it would make sense to tax non-personal services income at higher taxation rates than wages. However, as soon as you suggest that, the instant and obvious retort would be that people in a period of relative dissavings such as pensioners and unemployed people, then that would be unfair.
If the rewards of an economy and the taxation collected therein is to be truly fair, then ideally all income would be taxed at the point of reception but that's impossible as people who collect more in the way of dividends, rent and profits are usually also in a better position to reclassify and divert those income streams into entities like trusts and companies to minimise the amount of tax they pay. The taxation system is invariably complex only because people such as me invent ways of getting around the system. Industries such as the salary packaging industry, live inside the pockets of perks; generating nothing of actual real capital value.
"We need to consider that about 300,000 Australians are expected to move into the second-highest tax bracket over the next two years. In just 10 years, nearly half of all taxpayers will be in the top two tax brackets — an increase from about 27 per cent today to 43 per cent."
"Higher tax rates provide a disincentive to economic activity."
The problem that I have with the argument that bracket creep or rising taxation rates acts as a disincentive to work harder is that it's untrue on at least two fronts. The first being that high taxation rates generally aren't a disincentive to people working harder because in periods such as the 1980s when marginal taxation rates pushed beyond 60%, people still continued to work hard and CEO pay still tended to widen to many multiples of average workers' pay. If the semi confiscatory taxation rates truly were a disincentive to work hard, then why didn't this ever show up in the real world. The second issue I have is that as discussed previously, working "hard" has long since been decoupled from rewards anyway.
At the point where you're likely to experience bracket creep, you're already being paid a princely premium for your work anyway. Besides which, dividends, rents and profits represent the rewards for other people's work; so in reality taxation and transfer in that regard is something of a mechanism for returning the rewards for work back to the people who actually worked in the first place. As for transfer payments to people on disability pensions, old age pensions and unemployment benefits, the total combined transfer payments to those people who do not work is financially cheaper than to people at the top of the pay scale. I suspect that upper and middle class welfare and tax avoidance costs more to governments budgets than transfer payments to poor people, its just that people who control the media have a vested interest to demonize the poor.
At this point there are four basic options:
1. Bash pensions, disability payments and unemployment benefits to poverty levels.
2. Asset Sales.
3. Raise income taxation rates.4. Raise the GST.
5. Raise collections from Company Tax.
1. Unless the government really did want to reduce the conditions of pensioners and people on benefits to that of the nineteenth century, then this probably isn't much of an option. Whilst it might be great for a narrative to get "tough" on people on disability and unemployment benefits, the biggest reason why disability pensions are so high is that governments already don't want to address disability issues and even if you were to reduce unemployment benefits to zero, it only tinkers with a sliver of the budget.
2. Previous governments have already sold off the brightest and best assets that they previously held. What are now private corporations like Telstra, the Commonwealth Bank, CSL, the airports any far too many more, all used to pay their profits into consolidated revenues and this helped to reduce the taxation burden. The only real things left that are worth selling are Australia Post, the ABC and breaking the backs of the States to sell off the hospitals. Corporations like News Corp Australia would love the idea of selling off the ABC and have been pushing for that since practically its inception. Selling off the hospitals to the highest bidder would give us a health care system like the United States; probably with the same sorts of outcomes.
If this is indeed the end game which is being proposed, then please forgive me if I'm more than a little suspicious. "Trickle down economics" is all well and good if you are a government which deals in three word slogans but it's not so great if the thing you happen to be standing under is a very large horse.
4. GST is regressive and hateful (see Horse 1024²). Reducing Income Tax and increasing the GST would exactly achieve the aim of conservative party; that is to conserve and entrench privilege. The thing is though that the majority of poorer people are too stupid to realise what's happening to them; they'll only see that their Income Tax has been reduced. Whilst increasing the headline rate of GST might be politically damaging, as part of a broader narrative, in might be saleable.
5. In the 2015-16 Budget, Company Tax accounts for $68.2 billion out of total revenues of $397.9 billion. Now I'm not sure what proportion of total GDP is represented by Companies but I'm reasonably sure that it's probably a heck of a lot more than 17%. I find it absolutely impossible to believe that the corporate sector accounts for less than one fifth of total GDP.
Even more than individuals who have access to vehicles such as Trusts, SMSF and using Companies to avoid tax, very large transnational corporations have access to exotic arrangements which span countries in order to avoid tax. If the government changes the rate of company tax, then all that this is likely to do is change the mix of strategies employed by small business and individuals to avoid tax.
"Second, any reform must be fit for purpose in the modern economy. We have a tax system with 1950s rules that simply doesn’t fit with a modern, globalised economy."
As Treasurer, Joe Hockey is asked to square the circle. Options 1 & 2 will annoy the left and jeopardise the chances of the party at the next election. Options 3, 4 & 5 will annoy the right and jeopardise the chances of the party at the next election.
Perhaps rhetoric is in fact the best and only option available. It means not doing anything and with the added bonus of kicking the can down the road a little further. An opinion piece in which you can sound lofty and at the same play to an audience. It also makes it harder to work out where this treasurer lies.
"It won’t be the government that determines the next technological or commercial breakthroughs. It is hardworking men and women who make the difference."
Is that a promise? The CSIRO is largest patent holder with more than 3500 patents, trademarks and inventions. Things like WiFi, the Hendra virus vaccine, drought resistant cotton varieties and long wear contact lenses were invented by the CSIRO. The government has very much in the past developed important technological or commercial breakthroughs because only governments have the capacity to invest in seemingly profitless enterprises. Governments might not necessarily determines the next technological or commercial breakthroughs but they can help.