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Illustration: Sturt Krygsman. Source: News Corp Australia
THE degree of ignorance about the distribution of tax across households is remarkable, especially given that the truth is so easily and freely accessible. For politicians perhaps it is wilful; the facts suit neither side.
The Left typically tries to create the impression the “rich” aren’t paying their “fair share”. Consider former treasurer Wayne Swan’s attacks on “mining billionaires” and welfare groups’ continual prattling about the financial benefit of concessional super taxation to high-income earners.
The Right, meanwhile, evokes the ordinary, “battling” taxpayer, whose hard-won earnings, so the argument goes, are siphoned off to pay for inefficient or ineffective government programs.
But the overwhelming bulk of people in Australia pay no net tax at all. High-income earners have become a giant pinata that the majority hit for extra money to pay for whatever new social spending programs the political class proposes to stay in office.
Our constitutional democracy, rather than safeguarding a set of inviolable tax rules applied under the rule of law, has become an elaborate mechanism for extracting resources from a small minority for the much larger majority. A crude summary might be “pay up or else”.
Only the top fifth of households ranked by their income - those with incomes of more than $200,000 a year in the financial year ending June 2012 - pay anything into the system net of the value of social security in cash and kind received, according to data from the latest Australian Bureau of Statistics survey of household income.
The distribution of personal income tax - the federal government’s biggest source of revenue, raising about 45 per cent of the total ($165 billion this year) - is far more progressive than headline marginal tax rates suggest. Including the 1.5 per cent Medicare levy, Australia’s income tax rates range from 19 per cent for every dollar of income above $18,200 to 46.5 per cent for every dollar above $180,000. Most taxpayers face a 34.5 per cent marginal rate.
But average income tax rates on households’ privately generated income (ordinarily wages and salaries, but dividends and rental income too) ranged from 1.5 per cent for the bottom fifth of households in 2012 to 22 per cent for the top fifth.
The 1.73 million households in the middle quintile paid an average tax rate of 12.3 per cent on average incomes of $88,900. But the ABS survey estimates these households received $31 a week in Age Pension payments, $13 in disability payments, $48 in child-related payments and $12 in unemployment benefits, along with a host of others that whittle their average net tax payments down to $84 a week.
This sort of analysis excludes the value of government benefits beyond cash: “free” schools, hospitals, public transport and the like, which the ABS estimated to be $413 a week for these middle-ranked households. Netting everything off shows even “average”, let alone lower-income, households got back $2.70 for every $1 they paid in tax. Households in the bottom quintile enjoyed benefits worth more than 320 times what they paid in tax compared with about 10 times for those in the second-lowest quintile.
Notwithstanding the enormous variation in the circumstances of individuals and households within each of these five buckets - for instance, childless, healthy workers will pay in much more than unemployed families with sick children - the disparities are as remarkable as they are little-known.
Factoring in payment of “regressive” taxes such as the GST and tobacco and alcohol excise doesn’t appear to alter the overall picture. Every six or so years the ABS painstakingly distributes the burden of these “taxes on production” across households, based on estimated consumption patterns.
In the financial year ending June 2010, what one might call “holistic average tax rates” (including indirect and direct taxes and net of social security in cash and kind) ranged from -64 per cent for the bottom quintile, to -22 per cent for median households and 13 per cent for the top fifth of households.
Put simply, only the top fifth of households paid any tax. The bottom 6.9 million households, while often incurring income tax liabilities and regularly paying GST, received more in cash welfare and services than they paid in.
The concentration of the tax burden on higher-income earners would be starker still if the many tens of thousands of senior local, state and federal public servants - whose salaries often exceed $200,000 a year - were considered a cost. One could argue that the taxes paid by workers whose jobs depend on taxing other workers are akin to a cash refund to everyone else, rather than an organic contribution.
It is absurd to claim the “rich” - assuming incomes rather than wealth are the defining criterion - aren’t paying their “fair share” of tax when they in fact pay all of it. Equally, to argue that the “average” worker is subsidising government folly is difficult given that their aggregate benefits exceed the tax they pay.
Without making any judgment about the merits or fairness of the status quo, the burden appears to be shifting further toward higher-income earners. Comparing the 2003-04 and 2009-10 financial years, holistic average tax rates fell on average 8.2 percentage points for the bottom three income quintiles, but only 4.6 per cent for the top two quintiles.
It is still difficult to explain why these rates fell because there are so many moving parts to the social security and income tax systems. Of course, lower tax rates do not imply that less tax is collected: the level and growth rates of income across income quintiles varies and a one-percentage-point drop in average tax rates for higher-income earners has far greater consequences for revenue than much bigger changes for others.
Separate data from the Australian Taxation Office confirm rising progressivity. Based on income tax returns from the 2010-11 financial year, the top 1 per cent of individual income earners - who in the 2010-11 tax year were those with taxable incomes of more than $281,800 a year - paid $23.55bn or 17.7 per cent of the total income tax haul, up from 17 per cent in 2009-10.
Meanwhile, the top 10 per cent of taxpayers - with taxable incomes of more than $105,500 - paid 46 per cent, up from 45.3 per cent a year earlier. The bottom third paid less than 5 per cent in both periods.
The highly and increasingly progressive nature of Australia’s tax burden is clear, but why?
First, income tax becomes more progressive every year without any deliberate change because of what economists call “fiscal drag”. Because the income tax thresholds are fixed in nominal terms and prices tend to rise, every year more taxpayers are pushed into ever-higher tax brackets and larger portions of their real incomes are taxed at higher rates.
Also, most people earn relatively little. While the ABS reports that average annual earnings for individuals were $74,000 a year last May, this figure doesn’t reflect typical circumstances because the “average” is an irrelevant socio-economic metric, increasingly undermined by rare but very large individual incomes. According to the 2011 census, the median household income, which is unaffected by outliers, was only $64,100.
Within advanced countries, the distribution of incomes has become more and more skewed since the 1980s, albeit less rapidly here than in the US and Britain. Economists debate vigorously whether this is because globalisation has boosted the financial returns to innovation, talent and skilled work, or whether the corporate (especially the finance) sector has become more skilled at extracting income at the expense of everyone else (”rent seeking”).
Regardless, burgeoning incomes at the top have given governments a lucrative and politically attractive revenue source. Both major political parties in Australia have been able to promise extra, vote-winning government spending that increasingly overwhelms growth in taxes paid by the vast bulk of the population.
The Labor government’s decision to lift the Medicare levy to 2 per cent from this July to partly pay for the forthcoming disability insurance scheme is a good recent example. For its part, the Coalition wants to impose a temporary “levy” on big companies’ profits (which will reduce dividend income flowing to upper-income earners) to pay for its paid parental leave scheme.
The massive disparity between gross and net payments of tax - 12.6 million people lodged income tax returns in 2010-11 - suggests “churn” is rampant and an immensely complex system is rife for rationalisation: we have more than 100 different taxes across three tiers of government interacting with a multitude of social security services in cash and kind.
The administrative costs of collecting taxes - especially income tax - are large, not to mention the damage they cause to enterprise and effort.
Cutting cash social security along with the first few marginal income tax rates, for instance, would create a more honest tax system and prompt a virtuous cycle of reducing welfare dependency, boosting employment to boot. By converting “in-kind” social security to cash, state governments could provide parents with a voucher to spend on schools administered in the private sector, would help to boost transparency.
Only a tiny share of the population were eligible for the very low rates of income tax that emerged in English-speaking countries in the late 19th and early 20th centuries. While the scope and size of governments have soared since then, the price of civilisation still, rightly, falls disproportionately on the richest.
The distribution of tax is not the problem but its growth as a share of national income is (along with undue focus on income rather than wealth as the determinant of someone’s capacity to pay).
Critics tend to argue that ever-greater taxes drive economic activity overseas and reduce the incentive to work, undermining growth. These are valid arguments but they do not answer the question of what is the most desirable “inequality-economic growth” trade-off.
No number of studies showing that rising tax rates stifle growth, however statistically persuasive, will match glib, emotional arguments that the “rich” can “afford” to pay, so we should make them. The moral case for fixed, reasonable taxesmay resonate more than the pure economic one. Arbitrary increases in taxes to pay for services the market can and should provide offend the rule of law and erode individual property rights.
