Home > Environment > Profits are 150 per cent of GDP ??

Profits are 150 per cent of GDP ??

February 16th, 2005

Yesterday’s Fin had a piece by Louise McBride arguing for cuts in personal income tax rate, and including the claim that, according to Tax Office stats, Australian companies had a total taxable income of $1.1 trillion, far more than individuals (about $300 billion), even though individuals pay far more in income tax.

One thing I recommend to my students is to keep in their minds round number estimates of as many key economic magnitudes as possible, so they can be alerted by implausible claims, and can cross check. My first example is that Australia has a population of roughly 20 million, GDP of roughly $800 billion and therefore per capita GDP of $40 000 (the population number is close enough to do for quite a few years, GDP needs updating every couple of years to be within 10 per cent).

Alert readers will already have noticed that McBride’s stats imply that company profits are approximately 150 per cent of GDP. I know capitalism has been doing well, lately, but this seems unlikely. Unfortunately, I won’t have time to chase down the actual source for a while, so if anyone does have some free time to look at the tax stats and give me a hint as to what is going on, that would be great.

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  1. February 16th, 2005 at 11:21 | #1

    From 2001-2002:

    Companies reported total income of $1.5 trillion and total expenses of $1.4 trillion. $27.6 billion in total net tax liability.

    So I’m stuffed if I know where how taxable income has risen from $100 billion to $1.1 trillion in a couple of years.

  2. Sinclair Davidson
    February 16th, 2005 at 11:22 | #2

    Looking at the ATO data for 2001-2002 the relevant tables can be found at:
    http://www.ato.gov.au/docs/2002COM1.xls
    http://www.ato.gov.au/docs/2002PER1.xls
    Rough and ready, Louise McBride’s numbers are about right.

  3. February 16th, 2005 at 11:22 | #3

    that figure was from the ato

  4. February 16th, 2005 at 11:25 | #4

    Sinclair, those tables show that taxable income is $153,084,294,950. $153 billion old son, not $1.1 trillion.

  5. Sinclair Davidson
    February 16th, 2005 at 11:27 | #5

    I think she was looking at total income (column before).

  6. February 16th, 2005 at 11:27 | #6

    She has got income and net income mixed up. Dear oh dear.

  7. Sinclair Davidson
    February 16th, 2005 at 11:41 | #7

    Looking just at companies and individuals:
    Individuals have 58% of the taxable income, 13% of the total income and pay 66% of the tax.

  8. February 16th, 2005 at 12:00 | #8

    Its not just how much, its the distribution that matters.

  9. Sinclair Davidson
    February 16th, 2005 at 12:14 | #9

    Absolutely, as I have argued elsewhere, the tax distribution is horrendous. The top 25% of income earners pay over 60% of net personal income tax and only 40% of households pay more in tax than they receive in benefits (excluding health and education).

  10. Dave Ricardo
    February 16th, 2005 at 12:15 | #10

    Louise McBride is, according to the Fin, a “director of Grant Samuel, an adviser to the Board of Taxation, and on the board of the federal government’s Corporations and market Advisory Board and the Corporate Takeover Panel”.

    Pretty impressive credentials, right?

    Yet she seems not to understand the difference between revenue and profit.

    But it’s not just that.

    In the article, she says

    “it’s beyond comprehension how we can justify a higher rate of tax on an individual earning more than $50000 than on a company”.

    Actually it’s only beyond her comprehension. Ms McBride apparently doesn’t understand the system of dividend imputation either. For Australian residents, company taxes are merely withholding taxes, and the income tax paid on dividends is just a top up on what has already been paid by the company. Comparisons between the company tax rate and the top (or any other) income tax rate are of no relevance at all. If the company paid $1000 more in company taxes in respect of a shareholder’s share of the profits, the shareholder would pay $1000 less. If the company paid $1000 less, the shareholder would pay $1000 more. If it wasn’t for the complication of foreign shareholders, we could drop the company tax rate to zero, and nothing would change, apart from a bit of timing, on the amount of income taxation that is paid.

    McBride says that the “The Australian Taxation Office Statistics are chilling”. What is really chilling is that this woman is an adviser to the Board of Taxation.

  11. John Quiggin
    February 16th, 2005 at 12:21 | #11

    The actual quote, by the way is “n 2001-02 Australian companies reported total income of $1.5 trillion, taxable income of $1.1 trillion and paid $27.6 billion in total net tax liability.”

    I was going to make the points about dividend imputation and so on, but in the face of this kind of claim it seems pointless.

  12. February 16th, 2005 at 12:57 | #12

    Blimey, that makes the corporate rax rate 2.5%. I need a new accountant.

  13. February 16th, 2005 at 12:59 | #13

    And who is this Sinclair geezer whinging about made up numbers? Have you heard of the upside down U?

  14. February 16th, 2005 at 13:30 | #14

    Comment by Flute — 16/2/2005 @ 11:27 am

    She has got income and net income mixed up. Dear oh dear.

    test]
    The 2001 corporate tax accounts indicates gross corporate income (sales) are $1,491,901,445,574 whilst net corporate income (ie taxable profits) are $153,084,294,950
    This creative form of accounting would certainly inflate taxable earnings by an order of magnitude. The $27,573,658,100 corporate liability implies a corporate tax rate of < 2%. Why is she complaining?

  15. John Quiggin
    February 16th, 2005 at 13:41 | #15

    Has anyone worked out where the $1.1 trillion came from?

  16. February 16th, 2005 at 14:31 | #16

    Well Sinclair reckoned her numbers were roughly right, perhaps he could shed some light. I can’t see it anywhere.

  17. Dave Ricardo
    February 16th, 2005 at 14:37 | #17

    That McBride’s howlers got through is a poor reflection also on the editors at the Fin. You wouldn’t see it happen in the Financial Times.

  18. Sinclair Davidson
    February 16th, 2005 at 14:53 | #18

    I was looking at the total income figure and the GDP figures which work out to about 186%.

  19. February 16th, 2005 at 15:01 | #19

    I could form two companies and create a loop of buying and selling a dollar and get around 10 times GDP of revenue for each entity in about half an hour. Completely irrelevant. Where’s the 1.1 trillion Sinclair?

  20. Giles
    February 16th, 2005 at 15:07 | #20

    seems there’s a serious misunderstanding of how GDP’s worked out here – she said “income” not “income net of inputs” i.e. value added. This is a 101 example of idiocy!

  21. John Quiggin
    February 16th, 2005 at 15:14 | #21

    Regarding Dave at #17, let me defend the editors. It seems to me reasonable, from a number of perspectives, to rely on contributors to get their facts straight. If they are public figures like McBride, the fact that they don’t know what they are talking about is of interest in itself.

    As for freelancers like myself, if I got caught a couple of times with howlers like that, I would no doubt find myself out of a column. (I have made occasional factual errors, but I’m pretty careful).

    BTW, I don’t know about the FT, but the WSJ is full of howlers – in fact, any coincidence between its Op-Ed page and objective reality is purely coincidental.

  22. Dave Ricardo
    February 16th, 2005 at 15:26 | #22

    John, I know the Fin isn’t what it once was, but but you are setting the bar too low. You would think that the opinion page editor of a financial newspaper would see a number like $1.1 trillion and think, that just can’t be right. Or is his job simply to make sure the contributed article is within the agreed word length?

  23. Andrew Reynolds
    February 16th, 2005 at 15:46 | #23

    I think the calclations she may be doing (and expressing poorly) is that $1.5t total income, $0.4t non-taxable income, $1.1t taxable. My guess would be that there was about $400b in non-taxable income, perhaps because it has already been taxed overseas or for other reasons.
    Taxable profits would then be the result of:
    Total income – non-taxable income – allowable business expenses = taxable profits.
    Not the most intuitive way to do it, but effective.
    The question I would raise, from Dave’s comment at (10) is why do the 60% who are net receivers of income from the other 40% pay any tax at all? Would it not be more efficient (i.e. cheaper) to leave the money with them and just transfer the net amounts? The UK tax system at least makes a nod in this direction by increasing the tax-free threshold for those who here are in receipt of benefits, but why tax them at all? BTW, I am pretty sure I fit into the 40%, so the gain for me would be in the efficiencies, rather than an absence of taxation.

  24. February 16th, 2005 at 15:46 | #24

    Something of a track record, it seems. From Crikey:

    Wannabe Liberal candidate and alleged tax expert Louise McBride has had to withdraw a fundraising letter sent out on behalf of her brother, the self-proclaimed star recruit and Coogee candidate David, sometimes known as Sniff. In the letter she assures donors that donations of $1,500 or less are tax deductible. Of course, they’re not. Even little old lady branch treasurers could tell you the limit is a much humbler $100.

  25. February 16th, 2005 at 15:48 | #25

    Giles — 16/2/2005 @ 3:07 pm hits the nail on the head:

    there’s a serious misunderstanding of how GDP’s worked out here – she said “income� not “income net of inputs� i.e. value added. This is a 101 example of idiocy!

    t…test]
    Yes. My comment #14 16/2/2005 @ 1:30 pm lost a bit in transportation which included “Her method of national accounting double counts value added at each step of the corporate supply chain…this implies a corporate tax rate of < 2%. What is she complaining about?"
    I remember Martin Wolf taking Noreena Hertz to pieces for making the same howler a while back.(I am not, of course, implying that making this howler is a chick thing.)

    Ms Hertz’s claim that “51 of the 100 biggest economies of the world are now corporationsâ€? abuses statistics. She measures companies by sales, but national economies by GDP (which is a measure of value added, more akin to corporate profits).

    ..test]
    I am afraid AUS’s Economic Dries have lost a lot of their former intellectual zing since their poster-boy got trounced by Keating in 1993. The Cultural Dries have been making all the running since then, which is just as well.

  26. John Quiggin
    February 16th, 2005 at 15:55 | #26

    “and only 40% of households pay more in tax than they receive in benefits (excluding health and education).”

    Sinclair, do you have a source for this?

  27. Sinclair Davidson
    February 16th, 2005 at 16:01 | #27








    Flute. I don’t know where the 1.1 trillion came from. I suspect it’s a variation of the 1.49 trillion. It may even be a typo.

  28. February 16th, 2005 at 17:50 | #28

    Reynolds: Taxable income is very different to your incorrect sum.

    To think we have to go into basic bloody accounting on Quiggins blog. OE=A-L and all that. Sorry John.

  29. Steve Edwards
    February 16th, 2005 at 18:35 | #29

    Sinclair Davidson’s source can be found in this reference:

    Davidson S., ‘Taxation with Misrepresentation’, CIS Policy, Summer 2004/5

  30. Warbo
    February 16th, 2005 at 19:27 | #30

    I hope someone has written to the AFR pointing out the error.

  31. John Quiggin
    February 16th, 2005 at 21:04 | #31

    Thanks, Steve. I’ve checked this source, which has lots of interesting stuff in response to me, but a mere assertion of the claim, based on apparently unpublished analysis by Davidson himself. Is there a published analysis to support the claim?

  32. James Farrell
    February 16th, 2005 at 21:45 | #32

    Accordeing to ABS data Gross Operating Surplus for 2001-02 is about $218 billion, i.e. 30% of GDP as one would expect. I suppose the $153 billion is that figure minus income paid abroad by companies (and maybe capital consumption). So the $1492 billion must indeed be revenue by some definition. Could someone tell me why the ATO terms this ‘Total Income’, despite its being at odds even with everyday concepts of income?

  33. Steve Edwards
    February 16th, 2005 at 23:06 | #33

    “Is there a published analysis to support the claim?”
    In endnote 13, Davidson refers to his unpublished calculations. It would be good to see an entire article on this point.

    In endnote 14, Davidson appears to refer to the NATSEM study as quoted.

  34. Andrew Reynolds
    February 17th, 2005 at 01:12 | #34

    Flute,
    I have a passing knowledge of that equality – I work in finance for one of the large accounting firms. I suggest you have a (non-patronising) look at my equation again and see if you can make some sence of it this time.

  35. February 17th, 2005 at 08:08 | #35

    Andrew, Income = profit. You are thinking of revenue I suspect. I hope you don’t look after clients books.

  36. February 17th, 2005 at 09:50 | #36

    I am an economist, by training and occasional practice, not an accountant. I must say that accounting terms can be horribly confusing to the non-professional.
    Accountants say Corporate Earnings mean Gross Profits, although to a laymen Earnings are a Corporations Income before Expenses.
    Corporate Income, to most people, means Gross Sales. Except accountants loosely refer to incomings that are netted of outgoings (hence the muddle over value-added).
    It should not be that difficult to develop a consistent and unambiguous nomenclature that makes intuitive sense (going from grand productions to petty distributions).

  37. William
    February 17th, 2005 at 13:01 | #37

    “The question I would raise, from Dave’s comment at (10) is why do the 60% who are net receivers of income from the other 40% pay any tax at all? Would it not be more efficient (i.e. cheaper) to leave the money with them and just transfer the net amounts?”

    Yes, it would be cheaper. But this way keeps lots of people in the system, I think partly so the government can keep records. For example, having the tax-free threshold set at $20,000 would let hundreds of thousand of people out of the system. Or not requiring people on straight PAYG income of $50,000 or less to lodge a tax return would let millions of people out of the system.

    The question I would raise, as a tax accountant (half of my job is making sure clients pay the minimum tax), is: As an expert adviser to the Board of Taxation, what is Louise McBride’s area of expertise? Because it sure as hell ain’t taxation.

  38. Andrew Reynolds
    February 18th, 2005 at 01:13 | #38

    No, Flute, income does not equal profit. Income = revenue (the top line). Profit (the bottom line)= Income – expenses.
    Jack, it is in the interests of those in the profession to make it as obscure as possible. That is why this confusion happens in the first place.
    William, maybe her area of expertise is taxation. Have you seen a recent copy of the Tax Act? I guess you have as a tax accountant. It is about as understandable as her writing. Maybe that accounts for it.

  39. William
    February 18th, 2005 at 11:13 | #39

    Can’t argue with you saying tax law doesn’t make sense, I imagine it would be slow torture for someone with a passion for logic.

  40. drscroogemcduck
    February 19th, 2005 at 05:15 | #40

    i saw something just like this

    see if you can spot the implausible claim here

  41. John Quiggin
    February 19th, 2005 at 05:40 | #41

    True, Scrooge, though even with the correct figure of $15 000/head it’s still startling.

    (JIm Soorley takes the $US300 billion spent on the Iraq war and estimates it at $150K/iraqi).

  42. February 19th, 2005 at 11:44 | #42

    John Quiggin — 19/2/2005 @ 5:40 am looks at past costs not future benefits:

    Jim Soorley takes the $US300 billion spent on the Iraq war and estimates it at $150K/iraqi.

    est]
    Iraq has about 100 billion barrells of oil in untapped proven and likely reserves.
    Oil prices seem to be bumping around the $50.00 mark. They will probably stay not far off that since there are not alot of new ields coming on line, whilst the ME remains in turmoil and as IND & PRC maintain the pace of industrialisation.
    Iraqi crude is very clean, with little prodcution distillation costs. So most of this price goes as gross profit to the seller.
    This gives the political sovereign of Iraq a total value of about $5 trillion worth of oil assets. Obviously this is a highly speculative figure, since it will take generations to tap that oil and there is no telling what production costs, or consumption prices, will be in fifty years time.
    Still $5 trillion is a lot of dough, about half the value of the NYSE, split between 20 million people, only ten million of whom are adults and half of whom are males.
    Five million males chasing after $5 trillion gives each male a potential million dollar payoff. So it is clearly in the interest of some Iraqis to resist the US, even given the US’s large per capita expenditure on this nation.

  43. Ian Gould
    February 20th, 2005 at 15:28 | #43

    Yes Jack but you’re forgetting that it’s more appropriate to consider the net present value of asset based on the future revenue stream.

    Assume future annual production of 3 million barrels per day and annual revenue becomes approximately US$54 billion or approximately US$11,000 per adult male Iraqi.

    That implies a NPV of around US$300,000 – based on
    a forty year revenue stream and a 3% discount rate.

    On the other hand, given the reported 80% unemployment rate in Iraq and the low cost of automatic weapons there, the opportunity cost of taking part in the insurrection – or other forsm of rent-seekign such as kidnapping and extortion -are pretty low.

    Then to, so far we’ve neglected to consider the liabilities side – Iraq’s foreign debt is pretty high and the US seems to be piling on new liabilities even as the Saddam-era debt is being written down.

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