August 20, 2015

Horse 1964 - It's Mean To Talk About An Average, Joe
"Bracket creep will mean that the average full time wage – currently around $77,000 – will soon sit in the second top income tax bracket of 37 cents in the dollar," Mr Hockey said.
"This is just not good enough."
- Joe Hockey, as quoted by Nassim Khadem, Sydney Morning Herald, 15th Jul 2015

I heard the Treasurer Joe Hockey on the television tonight again talking about bracket creep as though it were the Nothing from the 1984 movie "The NeverEnding Story" but unlike The NeverEnding Story which had an end, Mr Hockey's story has no end and is being told from the Ivory Tower rather than about it.
I thought about the use of the term "average" and how whilst it might seem to be perfectly reasonable, as the average includes every value in a distribution, it is very much influenced by outliers and skewed distributions. In the case of incomes, there is a case to be made of heavy skewing and there are some utterly obscenely outlying outliers. Together, they made the use of an average as applied to incomes, as useful as useful as a wooden frying pan.

Part of the problem is a deliberate obfuscation of the measures of central tendency. That is, those figures which better help to describe how a set of statistics is put together. An average is a figure derived by adding together all the statistics and then dividing by the number of items. A much better indication of what might be something approaching what more "normal" people earn is the figure known as the "median". Like the median strip which runs down the centre of a highway and cleaves it in twain, the median is the figure which slices a set of statistics into two halves - exactly half the statistics in the set are below it and exactly half are above it.

Consider the following country of Rollovik. It is a very small nation consisting of ten citizens and whose chief export is widgets. The Taxation Department publishes a list of everyone's incomes and they are as follows:
10K, 15k, 20k, 20K, 50K, 50K, 50k, 50k, 75K, 410K.
The average of all of these wages is 75K but the median wage is 50K. 50K is the number which splits the nation in twain. It is safe to say in this case that 50K is a number which more accurately reflects the spread of incomes.

If the top two tax brackets started at 80K and 200K and the Treasurer started complaining that the average wage was going to pass into the second top tax bracket in a couple of years, you'd probably be quite justified in thinking that whilst that might be technically correct, you'd wonder what all the crowing was about.

Yet this is precisely the case in Australia. We have Treasurer Joe Hockey running around crying blue murder and that the sky is falling, by saying that by the end of the decade that the average wage is going to move into the top tax bracket. Oh how sad. My heart bleeds.

Finding statistics on things like median wages is a little bit more difficult than average wage because of the lag in reporting. Even so, the most up to date statistics that I have are from August 2013 and they paint a very different picture than the one we're being fed in the headlines. In Aug 2013, the average wage was $73,886 per year but the median wage (that is the one which divides the population in two) was $49,400 per year. That means to say that half the population had a wage of $49,400 or less². Also of note is that this publication has been discontinued. By keeping the population ignorant, they don't know how much they're being done over by.
If inflation is running at 5% (which is isn't and would probably be seen as disastrous) then the average wage would find itself in the second top tax bracket in 2015. The median wage though, wouldn't reach that point until 2025. At 5% inflation, the  second top tax bracket wouldn't even be reached for a whole decade; longer if inflation is more gentle.

"We must address bracket creep because it is better to leave money in the pocket of the taxpayer and resist the temptation for the government, using taxpayers' money, to provide financial support to individuals and families."
- Joe Hockey, as quoted by Nassim Khadem, Sydney Morning Herald, 15th Jul 2015

This talk about changing the tax rates because they "hurt" people's wages might have sounded reasonable to most people because it is the figure of Average Weekly Ordinary Time Earnings (AWOTE) which is published every six months but the figure for AWOTE as in the case of the invented country of Rollovik, isn't the best measure of central tendency if the overall distribution of wages is skewed. Furthermore, to parrot this as the basis of policy when talking about taxation, when the intent is to reduce Income Taxation which is progressive and replace it to a degree with an increase in the GST which is regressive is nothing short of deceptive and detestable.

It is impossible to say exactly what proportion of the population earns less than "average" wage but it certainly is not 50% as you might expect. The only thing we can know for certain is that half the population earns less than 83% of the average wage.
The other thing which we don't know about is what percentage of the population deliberately modified their incomes through the use of companies and trusts to change their income.
If you'd just been shy of the top tax bracket at $180,000 in 2015, on $180,000 you'd be assessed for $58,147 in tax. Provided you can find either a spouse who earns nothing or a willing partner, you could in theory divert $90,000 to them; you'd both be assessed for $23,047 which adds up to $46,094 and you'd have saved $12,053 for doing practically nothing. This sort of thing like all tax avoidance strategies is not illegal but getting more than 12 grand for just shifting money around starts to sound shrill when half the population doesn't even have that sort of cash to rub together.
This might be something to consider. Of the 3 million people who work Part-time, their median wage for the year 2013 was $23,296. In comparison, my annual rent for the year 2013 was $18,720. If you had a single person working under such circumstances, they'd have $4576 a year left over or $88 a week from which everything would have to come. Maybe that's achievable but it would be a pretty miserable existence.
Is it really better "to leave money in the pocket of the taxpayer" than to "provide financial support to individuals and families"? If tax reform ends up about addressing bracket creep by replacing it with the GST, then this shifts the actual tax burden away from the utterly obscenely outlying outliers to those who earn less than the "average" and that's just mean.


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