Generally, I’m impressed with the Pirate economic, tax and welfare reform policy. I think it’s progressive and far sighted and i think UBI is the future of all advanced economies and perhaps the world (if we’re not overcome by climate catastrophe…or Trump).
However, i don’t understand why you’d lower the highest tax rate. Is it just to maintain the cleanness of 37.5% across the board? An individual earning $1 million a year will benefit under this policy significantly and it just seems to me odd that this is deemed as desirable. Or is the policy aimed at attracting wealthy voters?
What about people who earn $10 million a year? Or people that earn $100 million a year?
I doubt the Australian public would care if earnings over a million cost the individual at least 50% in tax.
Given that the economic reform needs to make up $30 billion, i’m curious as to why the top end isnt being asked to tip in a bit more.
ps…i’m not an economist so i may be missing something obvious.
Our policies tend to be radical in their aim but moderate in their implementation. This may be an example of that. Certainly we seek a progressive tax policy that maintains a proportionally high rate on the top brackets.
Thanks miles, I think that’s a wise philosophy generally. I’m not entirely convinced it’s economically sensible in this case but as I said i’m not an economist so I defer to your costings.
One more point, there is a move to raise Newstart allowance by $75 a week equating to $19k pa. Will you adjust your UBI upwards to equal that rate should it happen?
And I’d if so, how would that impact the costing of the economic reform policy?
Judging by our last adjustments to the UBI policy, I expect that we’d adjust (i.e. raise) both the threshold and the percentage to match the 19K while trying to minimise budget blowout. @MarkG could comment further.
In the past I’ve suggested we model our BI to see what sort of effects retaining the existing second tax rate of 50% on higher incomes would have, although I didn’t push the issue.
The main rationale for having a lower top tax rate within our policy framework is that we are massively increasing the progressiveness of the income tax itself by reforming the base. A lot of tax concessions which are available overwhelmingly disproportionally benefit higher income quintiles e.g. Capital gains tax discount, negative gearing, and superannuation tax concessions
So when we broaden the income tax base on higher incomes, we intend to (partially?) offset this with cutting the rate.
Why would we cut the rate?
There are 3 main arguments against very high top marginal rates of income tax (although I’m not necessarily suggesting 50% is too high).
The first is it doesn’t actually do much for combating inflation i.e. Reducing aggregate demand. Higher incomes have a lower propensity to consume, so as a tax it should not really be considered useful in any sense of it “raising revenue”. You could argue for it on the grounds of equity, although in terms of combating inequality taxing monopoly assets is arguably more effective in this era than very progressive income tax. The rich tend to not make realised personal income, but rather make capital gains and use this to engage in debt leveraging.
The second is very high tax rates for individuals tend to support a bloated tax minimisation/avoidance industry, which is a massive waste of real resources in our economy. In this sense having a higher tax rate seems fairly counterproductive. Although if we tightened tax concessions this could also be less of an issue.
The third problem is the tax system works better if the top marginal rate is more aligned with the company tax rate. The problem is if we tax individuals too heavily relative to companies (or trusts), then individuals can set up companies to engage in consumption and saving/investment while avoiding tax. Now given the trend of company tax rates more generally is down, it seems unlikely that we would be raising the company tax rate to try to match the top marginal rate. https://treasury.gov.au/publication/economic-roundup-spring-2004/international-trends-in-company-tax-rates-implications-for-australias-company-income-tax/#P115_18831
There is also an argument that high marginal rates deter extremely talented mobile workers from migrating and working in Australia, although that argument seems pretty thin given our immigration program. Top marginal tax rates might have some influence, but it seems highly dubious that they would be a major deterrent at current levels. Or that this is a very significant loss or distortion on an economy wide level.
Despite all this, I have few ideas for how we could sustain a second higher rate of personal income tax (e.g. up to 50%) while combating the apparent imperatives for company tax cuts for large (predominantly foreign owned) businesses. Although I haven’t put them on the table to date, since we haven’t had a serious drive to model a second higher tax bracket. I have our basic BI spreadsheet model and access to some freely available tax/transfer treasury models, but have not had the time to model it myself.
To get an idea just how progressive removing those tax concessions are, just take a look at CGT discount. Removing superannuation tax concessions is probably even more progressive.
We had a discussion about this earlier last year. The real issue with raising the BI substantially is just how costly it is and high we would have to push the tax rate up. Even if we did have a 2nd tax bracket at 50%, it’s not clear that this would be sufficient to keep the lower tax rate from rising a lot.
At the moment the problem of inadequate Newstart is a bit redundant, since we propose a Job Guarantee. And all of our commitments ensure other welfare is at least the same as the present system. So provided we aren’t forcing people onto Newstart/BI when they should be on a DSP etc. it shouldn’t be as much of problem.
Under our current platform you’d only end up on pitiful Newstart if you either a) didn’t take up a Job Guarantee offer, or b) got sacked/sanctioned from being employed in the Job Guarantee program (which should be highly flexible to meet needs of worker) - which even then does not prevent people from still seeking private employment via the reintroduced nationalised employment services provided (the CES).
This is not to say we shouldn’t consider increasing the BI. It’s just not as great an imperative, and we need to consider the cost tradeoffs with much higher tax rates. Paying 37.5% from the first dollar you earn is pretty damn high. It means as minimum wage worker working for $18.93 p/h, your effective hourly rate is only $11.83 p/h. If the tax rate jumped up to 45%, your effective hourly pay would only be $10.41.
That’s going to cause a lot of inflationary pressures in wage demands and deteriorations in the participation rate if it’s not managed right.
A better solution would look at different tax bases e.g. Land and resource rents. Although the most glaring issue here is also the opportunity cost of raising the BI. For the amount of resources spent on BIs of significant magnitudes, we could have the entire Norwegian welfare state and some leftover to spare. I’d argue thus a large BI is an inefficient use of public resources, given there are a number of areas where governments could instead channel resources into universal public goods at much lower cost. Not only would such resource usage be more progressive as it disproportionately benefits the least well off, but it would be a lot cheaper and reduce the overall cost of living.
I think Jesse covered most of it. A flat tax offers serious benefits for transparency and minimizing loopholes, and many of these benefits are lost if you start adding new levels.
It’s worth looking at the change in totality. The income tax rate falls to 37.5% but all the loopholes around CGT etc (overwhelmingly used by the wealthy) are gone. And we substitute for the most regressive taxes with a highly progressive land tax. When it’s all put together we should see a small gain in progressiveness, a big gain in transparency, and a scrapping of all the systems that meddle and control the lives of poor people.
If the Newstart allowance gets lifted, members of the policy team (which anyone can join) will decide how to respond. My 2 cents is that basic income should never fall below Newstart.
There is one stronger argument for progressive income tax rates which I will put here for everyone. This is one of the few arguments which I subscribe to and which still leaves me to consider the validity of having at least a second rate.
(Note progressive income taxation here is meant as counter-cyclical, not the pro-cyclical; which is a typo error. The tax burden increases during booms and falls during busts, which helps stabilise the business cycle).
Not quite sure about that one. Do we really want taxes on wages to perpetually rise just so we can have “flexibility” on tax cuts? If you’ve studied the history of tax then you know what “progressive” income taxes (combined with inflation) actually do. They progressively push more and more of the tax burden onto labour, while company and rent taxes fall. It’s a subtle rigging of the game against workers.
If we really want flexibility, we should reduce the reliance on automatic stabilisers. When recessions come, we can respond in a customised way, and look for the opportunities a finely crafted stimulus package can bring. Is it a debt recession, a trade war recession, an equity recession? The optimal stabilisers & stimulus tools will vary with each.
That would be good Mark. Unfortunately, the stalement of our current political system suggests government of the future may be generally incapable of responding with the kind of flexibility that is required there.
Responding in such a sophisticated way is not really compatible with political control.
It needs to be enacted more like a public service function, like the way that the reserve bank operates.
I named the tax in my company PayPal TDS ( Tax Deducted at Source ). They directly report to ASIC.
So that’s 5% at source that goes to them. Anyways contractors are at 5%.
Physical goods should be TDS at 10%.
The buzz word being ‘uniform taxation at source’ or ‘uniform TDS’.
Nothing more. Period.
Onerous tax requirements are a crime against humanity.
Tax not deducted at source is a crime against humanity.
Subtract it in the EFTPOS machine please and do not tax cash transactions.
By all means one should ask for a refund of every cent taken by them in TDS. By filing an amendment for previous years.
One should login to the ASIC portal and start valuing and declaring every single sociable contact for ever and claim back everything.
Never pay forward taxes. Always get refunded back taxes. No more.
If they don’t have a portal of all accounts themselves then they’re at fault. So they cannot chase anyone willy nilly every time the govt changes and someone is elected with a mandate to ‘do something about them’.
Please be advised that shares were sold of the kingdom as early as 0 BC.
The investments should be 50-100% tied in with state of affairs metric. People on the streets. And societal extra marital sex metric.etc
Mark this kind of flies in the face of what was the biggest lesson from the Great Depression. Yes we should have off the shelf stimulus plans always ready in the pipeline to respond to falls in aggregate spending, like Japan does. However removing the automatic stabilisers is economic suicide. The GFC made this obvious. Had there been no automatic stabilisers in every country that didn’t do stimulus for political or economic reasons (everyone but Australia), it would have been a repeat of the Great Depression. The US was worse off because its stabilisers were so poor from progressive Republican cuts. Greece was a disaster (edit: an atrocity) because austerity hacked into and ran against the function of the stabilisers.
The GFC was in essence a Great Depression with automatic stabilisers in place - it was the purpose they were created for after the Great Depression in the first place. It’s an insurance policy in case politics fks up.
Well if the inflation is being driven by excessive wage demands and wage-price spirals, then of course we want it. Also you are mistaking political economy with economics. Yes tax bracket creep is bad and regressive in economics terms. However if politics constrains your ability to curtail inflation through explicit discretionary tax changes, then bracket creep as an institution is a good backstop.
One of the reasons inflation and the price-wage spiral persisted after the 70s oil shock is there was so much indexation in wage and spending agreements, that there was no room to impose the real income losses until the accord and superannuation. Indexation is a terrible and toxic economic institution - if you want further proof look at Brazil. They can never get inflation out of their system because indexation keeps the cycle going round and round.
Thanks to removal of various price indexations, the economy is now a lot more flexible to coping with price shocks and imposing real income loses than 50 years ago. If the same event were to happen again we’d quickly see inflation dissipate through the system.
This is actually a good point Andrew. If we separate stimulus crisis management into a public service function by putting the funding directly to the responsibility of the RBA, then it would remove the political football problem. Although I’d argue that making these things more technocratic is the wrong direction. We need more democratic accountability and control of institutions, not more technocratic neoliberal management.
It’s a distinction between strategy vs. tactics, or non-executive vs. executive control.
The political level should set strategy/goals, and the ‘technocrats’ get to make that work, with tactical freedom only.
Political oversight then becomes about checking that the technocrats are striving methodically and in good faith toward the political goals.
Heh heh… Yeah I didn’t see this critique coming. Seems I’m not the only one who thinks it’s a bit fanciful for the government to always be politically willing and savvy enough to enact a stimulus the moment one is needed. Never mind the instances when conservative governments deliberately try to do the opposite.
Economics and Political Economy are different worlds.
While this sounds good in theory, I’d argue it’s unrealistic and not historically observed to find “apolitical” technocrats who are sufficiently held to account for their decisions. Central banks are a good example. People like to think they are independent from the government, but in reality they’re on the phone every day trying to coordinate with the treasury’s spending decisions, and tend to set interest rates with a Hawkish fight inflation first bias (given RBA economists tend to be rigidly orthodox and economically conservative).
In the EU it’s even worse with the ECB. The ECB was effectively manipulating Italian bond yields during their elections to scare voters from the Eurosceptic party which was gaining massive momentum.
