The eternal conflict in politics, the great left-right divide, is the next problem of who should do what. The absolute extreme left is the position that the government should do everything and collect lots of tax; the absolute extreme right is the position that the government should do nothing and collect no tax whatsoever. Apart from the degree of social control that governments aught to legislate for and exert, politics is mostly the eternal argument between these two positions and pushing forth and back between them in order to win power.
The other thing to remember is that politics is a game which is played by people. The problem with people is that people tend to think that in the story of their lives, they are the good guy and what they think is best. They also tend to live in the present and so events in the past tend to have less weight on the formation of opinion than perhaps they aught to. If taxes are too high, then it must follow that taxes are higher than they've ever been, right? Whether or not this is actually true is mostly irrelevant since games played by people are always played in the present.
I decided to look into the past; into the story of taxation and see what was true. The following graphs are derived from calculations based on information from the Australian Bureau of Statistics and the Australian Taxation Office.
Taxation rates have more or less been on the slide since the late 1970s. Long gone are the punitive taxation rates of 60% and more, and yet there are still quite vociferous speakers, particularly on the right of politics, who think that taxes are still too high. Perhaps they are behind the latest push to increase the hateful GST from 10% to 15% because they know that this will shift the burden of taxation from the leaners at the top of the system to the heavy lifters somewhere in the middle (the people at the bottom already can't carry anything but don't worry, the GST will ensure that their legs are kicked out from underneath them - private affluence at the expense of public squalor is the order of the day).
When Joe Hockey was Treasurer, he raised the issue of bracket creep as an excuse to lower income taxation. I concur that bracket creep is indeed a thing but in the grand picture of the last 30 years, it's almost like arguing what colour to paint the fleas on a dog. Bracket creep is the notion that as people's income increases due to factors like inflation, that those increases pushes them into the next tax bracket. Fair enough, but income taxation is a marginal system and if your income is say $80,000 and your marginal tax rate is 40% and you get a pay increase of $1 which pushes you into a 45% bracket, then that 45% tax rate is only applied on that 80,001st dollar.
This graph shows the effective rates¹ of income tax for half of, one time, twice and four times Average Weekly Ordinary Time Earnings² (AWOTE) since 1985. All of these income tax rates have been obtained from the ATO website and then by working out what the rates assessed would be.
You will note that the effective taxation rate for AWOTE has remained more or less constant since 1985 but that for 4x AWOTE and to a lesser extent, 2x AWOTE have fallen. The biggest fall in effective income tax rates happened in the year 2000/01; commencing on 1st July 2000.
The effective taxation rate on half of AWOTE has also fallen but the most dramatic fall happens not in any AWOTE figure but the effective taxation rate on the Median Wage. The reason for this is quite sinister.
Median Wages have always been less AWOTE for a good reason. As a measure of central tendency, AWOTE whilst it might be a headline rate, is grossly inadequate to tell the story of what is actually going on. AWOTE which is an average includes all take home wage amounts but AWOTE includes the people at the very top of society whose wages have been increasing at many multiples that of the rest of the population.
Outgoing Telstra boss David Thodey reported back in August that his take home pay was 163 times that of the average employee of the company. His story is not atypical. In 1985 the pay mutiple of the CEO versus the average worker was typically about 20 times; in 2015 that has blown out to more than 100 times across the ASX. That means that the average CEO of an ASX 200 company takes about 3 days to take home the same wage as their average worker in the form makes in a year. That sort of rapid increase in that multiple is going to change the AWOTE figure quite markedly but the Median Wage, that is the value which slices all wages in twain, hasn't increased to anywhere near the same degree. This erosion of Median Wage as opposed to AWOTE certainly explains why the effective taxation rate on Median Wages is falling faster than everything else.
I want you to think back to Year 7 maths (yes I know that it might have been years ago but hear me out). You may remember the three measures of central tendency. The Mean or Average is all of the scores divided by the number of things. The Median is the score that splits the number of scores into two halves. The Mode is the most common score. When the Australian Bureau of Statistics quotes AWOTE wages, it's quoting Average Weekly Ordinary Time Earnings. I think that in principle, that this is simultaneously stupid and misleading and this is why:
The Commonwealth of Tiny is a small nation of ten people. In the year 20X5 it has:
5 people: income $20,000
50% unemployment.
Total wages $100,000.
Average wage: $10,000
The economy of Tiny is undergoing a serious reorganisation though. By the year 20Y5 it will have:
1 person: income $55,000; 9 people: income $5,000
0% unemployment - Yay! Unemployment has been eliminated.
Total wages: $100,000
Average wage: $10,000
Using a measure like average wages produces no change at all. The headline rate of unemployment has fallen; which means that the government has something to crow loudly about. However, more than half the income now goes to ten percent of the population and significantly more than half of the people are on half the average wage.
This might either sound like a triumph of economic planning if you happen to be one of the ten percent of people who have seen their wages skyrocket but if you are the majority of people, you are being seriously done in.
The Commonwealth of Tiny is not dissimilar to the Commonwealth of Australia. Since 1984 when the Median Wage was about 80% of Average Wages it has been steadily falling; if you follow the trend, then by 2018 the Median Wage (that is the wage which splits the population in two) will be less than 50% of the average wage.
I question the relevancy of quoting AWOTE when for half of the population, AWOTE is actually twice their wages. I'm not exactly sure which percentile of population that AWOTE actually maps to but for the Median Wage to have fallen that far it must mean that wages at the top end of the scale have increased by many many multiples. In 1984, management of companies was taking home a wage of between four and ten times that of their workforce; today it is not uncommon for management of big firms to be taking home a wage of twenty and thirty times that of their workforce with some CEOs of ASX companies raking in more than a hundred times that of their workforce. Yet at the same time, the average rate of taxation across the board is falling with people at the top enjoying the biggest tax cuts.
The argument given is that reducing tax allows firms to employ more people but the obvious hypocrisy here is that of course you can employ twice the number of people if you pay them less than half of what they would have got. This is also in the face of a massive amount of automation - when I worked at the Commonwealth Bank's money box branch at 48 Martin Place there were 24 tellers on the floor whereas when I went there last week, there were 3. Granted that the Internet has changed the way business works but I'm sure that the demands upon management have not meant that their work has become ten times harder; yet that's the reward they're given.
The implication for government of a falling Median Wage is that the tax take per person must also invariably fall.
This then is the real story of why government taxation revenues have been eroded. Falling taxation rates are the domain of government policy but wages mostly are not. Governments have made cases in the past that because AWOTE is rising, then everyone must obviously be better off but clearly this is a bald-faced lie. Median Wages, that is P50 wages, the amount of wages that divides society in half, have been on the slide against AWOTE expect for a blip during "the recession that Australia had to have" because management and CEOs suddenly found themselves being laid off. The next blip corresponds to declared wages during the height of the GFC but the trend reasserted itself reasonably quickly.
This is yet another reason why I find the GST and increases in the GST so very utterly hateful. Government revenues have to come from somewhere and if you aren't taking it from people who are earning two and four times AWOTE, then obviously the only solution which we're being given is to kick lower paid workers, the elderly and those people in periods of dissavings like the retired and the unemployed right in the guts. Kick them hard enough in the solar plexus and maybe you can get them to spew up even more taxation revenues, whilst you're also busy taking away government services from them.
Prime Minister Malcolm Turnbull's Cabinet Secretary Arthur Sinodinos said that:
"The first is to convince people why we need to go down this route...You have to convince people it's equitable burden sharing, everyone has their fair share of the burden to carry.
You have to make sure it's seen as a fair reform, which is why everything is on the table."
Sure, you can convince people of anything if you try hard enough. Confidence tricksters make their living from convincing people why they should surrender their money and I don't see why this is any different.
Because I work in an industry where I can see what people make and how much they are taxed, I get to see first hand what the effects of taxation policy are. It might very well be quite easy to make raising the GST whilst lowering income taxes be seen as a fair reform but if it isn't actually fair, then what?
Median Wages are falling relative to AWOTE and in consequence the effective rate of taxation which can be taken as a result is also falling. The solution of reducing income tax rates further and increasing the GST is quite frankly malevolent.
¹https://www.ato.gov.au/Rates/Individual-income-tax-for-prior-years/
²https://www.ato.gov.au/Rates/Key-superannuation-rates-and-thresholds/?page=35
³http://rollo75.blogspot.com.au/2015/08/horse-1964-its-mean-to-talk-about.html
You will note that the effective taxation rate for AWOTE has remained more or less constant since 1985 but that for 4x AWOTE and to a lesser extent, 2x AWOTE have fallen. The biggest fall in effective income tax rates happened in the year 2000/01; commencing on 1st July 2000.
The effective taxation rate on half of AWOTE has also fallen but the most dramatic fall happens not in any AWOTE figure but the effective taxation rate on the Median Wage. The reason for this is quite sinister.
Outgoing Telstra boss David Thodey reported back in August that his take home pay was 163 times that of the average employee of the company. His story is not atypical. In 1985 the pay mutiple of the CEO versus the average worker was typically about 20 times; in 2015 that has blown out to more than 100 times across the ASX. That means that the average CEO of an ASX 200 company takes about 3 days to take home the same wage as their average worker in the form makes in a year. That sort of rapid increase in that multiple is going to change the AWOTE figure quite markedly but the Median Wage, that is the value which slices all wages in twain, hasn't increased to anywhere near the same degree. This erosion of Median Wage as opposed to AWOTE certainly explains why the effective taxation rate on Median Wages is falling faster than everything else.
I want you to think back to Year 7 maths (yes I know that it might have been years ago but hear me out). You may remember the three measures of central tendency. The Mean or Average is all of the scores divided by the number of things. The Median is the score that splits the number of scores into two halves. The Mode is the most common score. When the Australian Bureau of Statistics quotes AWOTE wages, it's quoting Average Weekly Ordinary Time Earnings. I think that in principle, that this is simultaneously stupid and misleading and this is why:
The Commonwealth of Tiny is a small nation of ten people. In the year 20X5 it has:
5 people: income $20,000
50% unemployment.
Total wages $100,000.
Average wage: $10,000
The economy of Tiny is undergoing a serious reorganisation though. By the year 20Y5 it will have:
1 person: income $55,000; 9 people: income $5,000
0% unemployment - Yay! Unemployment has been eliminated.
Total wages: $100,000
Average wage: $10,000
Using a measure like average wages produces no change at all. The headline rate of unemployment has fallen; which means that the government has something to crow loudly about. However, more than half the income now goes to ten percent of the population and significantly more than half of the people are on half the average wage.
This might either sound like a triumph of economic planning if you happen to be one of the ten percent of people who have seen their wages skyrocket but if you are the majority of people, you are being seriously done in.
The Commonwealth of Tiny is not dissimilar to the Commonwealth of Australia. Since 1984 when the Median Wage was about 80% of Average Wages it has been steadily falling; if you follow the trend, then by 2018 the Median Wage (that is the wage which splits the population in two) will be less than 50% of the average wage.
I question the relevancy of quoting AWOTE when for half of the population, AWOTE is actually twice their wages. I'm not exactly sure which percentile of population that AWOTE actually maps to but for the Median Wage to have fallen that far it must mean that wages at the top end of the scale have increased by many many multiples. In 1984, management of companies was taking home a wage of between four and ten times that of their workforce; today it is not uncommon for management of big firms to be taking home a wage of twenty and thirty times that of their workforce with some CEOs of ASX companies raking in more than a hundred times that of their workforce. Yet at the same time, the average rate of taxation across the board is falling with people at the top enjoying the biggest tax cuts.
The argument given is that reducing tax allows firms to employ more people but the obvious hypocrisy here is that of course you can employ twice the number of people if you pay them less than half of what they would have got. This is also in the face of a massive amount of automation - when I worked at the Commonwealth Bank's money box branch at 48 Martin Place there were 24 tellers on the floor whereas when I went there last week, there were 3. Granted that the Internet has changed the way business works but I'm sure that the demands upon management have not meant that their work has become ten times harder; yet that's the reward they're given.
The implication for government of a falling Median Wage is that the tax take per person must also invariably fall.
This is yet another reason why I find the GST and increases in the GST so very utterly hateful. Government revenues have to come from somewhere and if you aren't taking it from people who are earning two and four times AWOTE, then obviously the only solution which we're being given is to kick lower paid workers, the elderly and those people in periods of dissavings like the retired and the unemployed right in the guts. Kick them hard enough in the solar plexus and maybe you can get them to spew up even more taxation revenues, whilst you're also busy taking away government services from them.
Prime Minister Malcolm Turnbull's Cabinet Secretary Arthur Sinodinos said that:
"The first is to convince people why we need to go down this route...You have to convince people it's equitable burden sharing, everyone has their fair share of the burden to carry.
You have to make sure it's seen as a fair reform, which is why everything is on the table."
Sure, you can convince people of anything if you try hard enough. Confidence tricksters make their living from convincing people why they should surrender their money and I don't see why this is any different.
Because I work in an industry where I can see what people make and how much they are taxed, I get to see first hand what the effects of taxation policy are. It might very well be quite easy to make raising the GST whilst lowering income taxes be seen as a fair reform but if it isn't actually fair, then what?
Median Wages are falling relative to AWOTE and in consequence the effective rate of taxation which can be taken as a result is also falling. The solution of reducing income tax rates further and increasing the GST is quite frankly malevolent.
¹https://www.ato.gov.au/Rates/Individual-income-tax-for-prior-years/
²https://www.ato.gov.au/Rates/Key-superannuation-rates-and-thresholds/?page=35
³http://rollo75.blogspot.com.au/2015/08/horse-1964-its-mean-to-talk-about.html
No comments:
Post a Comment