Home > Economic policy, Tax and public expenditure > Proof by exhaustion that we need a higher top rate of income tax

Proof by exhaustion that we need a higher top rate of income tax

April 4th, 2016

Watching the flailing of the Abbott-Hockey-Turnbull-Morrison government on budget policy has been grimly amusing, for those who enjoy politics as theatre. But it has also provided a nice lesson in the policy process, related to an apocryphal[1] story about (IIRC) Thomas Edison. After a thousand or so failed attempts to design a workable filament and design for a lightbulb, Edison was supposedly reproached with discovering nothing, and answered “On the contrary, I’ve discovered 1000 ways that don’t work”.

The AHTM government came to power with the twin slogans “axe the tax” and “fix the debt”, along with a commitment not to cut any public spending that people cared about, and to spend even more on the military than before. That created an obvious problem: how can we bring the budget back into something like balance, given that we have taken on substantial expenditure commitments, and that we can’t rely on bracket creep. To give them credit, they’ve tried just about every answer but one

* First, they tried the standard LNP approach of setting up a Commission of Audit, discovering a budget emergency and breaking promises on spending. That produced the disastrous 2014 Budget, which ended the careers of Abbott and Hockey in due course. Thanks to the backloading of the big cuts, it’s now destroying Turnbull and Morrison. Turnbull has backed off a little way on health, and is still stalling on education. But his disastrous floating of the idea of completely endingFederal funding for state schools means he’ll be in a politically untenable position when he tries to sell smaller cuts, while claiming not to want to kill the sector.

* Second, having killed the carbon and mining taxes, thereby making the deficit even worse, Abbott realised that it would be impossible to claw back the compensating tax cuts given to low income earners.

* Next Abbott called for a tax debate, but ruled out just about everything in advance. Turnbull and Morrison went one better, putting everything on the table, and then killing off each possible option as it ran into trouble. That included the GST, superannuation concessions, the tangle of negative gearing and concessional capital gains taxes, changes to dividend imputation and so on.

* Finally, long after the “all options” discussion was over, Turnbull popped up with the idea of giving income tax back to the states, which lasted all of two days. He is now trying the ludicrous spin that, having rejected his half-baked idea, the states are on their own financially.

So, the government has succeeded in finding lots of approaches that don’t work. The only one left is higher income tax for those who can afford to pay it. The first step would be to maintain the Temporary Budget Repair Levy until the budget is actually repaired. But the real answer is to recognise that the big gainers from the changes in the economy over the past decade or more have been high income earners, and this is the group who need to pay more.

I’m planning to do some proper calculations on this, when I get a little free time.

fn1. Retailing apocryphal stories is anachronistic, now that they can be falsified (or occasionally verified) with a quick Google search. But it’s habitual for old academics, and I regard it as a kind of performance art, like doing a high wire act without a net. In any case, Google is getting less and less useful for anything except selling stuff, so we may have to rely on old skills like memory again.

  1. Troy Prideaux
    April 4th, 2016 at 14:23 | #1

    I’m sceptical about the effectiveness of raising income tax for the higher end of town without tackling NG, capital gains and plain old evasion (generally offshore) but something has to be done.

  2. J-D
    April 4th, 2016 at 14:27 | #2

    The Edison story has drawn the attention of the Quote Investigator. The first record found was from a long-time associate of Edison’s, and it was subsequently implicitly confirmed by Edison himself, but both men’s testimony was recorded long after the fact, so it’s practically certain that Edison said something of the kind, but impossible to be sure what the exact original statement was (in particular, the number of things that reportedly didn’t work varies between accounts).

    (More details can be found by looking up the Quote Investigator’s full report.)

  3. J-D
    April 4th, 2016 at 14:42 | #3

    The AHTQ government? Is there a silent Q in Morrison? Fixed now, thanks

  4. BilB
    April 4th, 2016 at 15:39 | #4

    It is a total circus, particularly when it is laid out in that way.

    Perhaps the real solution is more of one and a little less of the other with high income earners carrying the larger load and the tax free thresh hold pulled back several thousand dollars as well. This coupled with the adjustment to the medicare levy, we are getting closer to some intelligent fiscal management. Next adjust the insurance bonanza, reduce negative gearing, reinstate the carbon price, and we might be slowing the decay.

    I’d also like to see how much the Government were being ask to contribute to the car industry against how much they have lost in tax revenue with that industry’s collapse.

  5. Mpower
    April 4th, 2016 at 16:47 | #5

    Maybe analysis of income tax without looking at wealth is doomed to be partial and inequitable and pointless. Is for example a 1% property tax the answer. Maybe deferrable till sale for retirees but no exemptions. Could be part of a package that is sort of tax neutral eg no stamp duty. Don’t worry, I am dreaming but is it the sort of thing a responsible Federal Governent could take a lead on. Would it appeal to a treasurer steeped in the real estate sector? Nope.

  6. David Allen
    April 4th, 2016 at 17:07 | #6

    Here’s one I haven’t heard yet: Sell Tasmania to China and lease it back. Is that one off the table?

  7. April 4th, 2016 at 17:25 | #7

    Well David Allen, after the climate change related natural disasters in Tasmania it sounds like you are suggesting a fire sale.

  8. Stephen
    April 4th, 2016 at 17:25 | #8

    They are a number of ways that would work and have been raised by many people.
    It’s not just finding a 1000 ways that don’t work it’s flailing around to try and find one that is acceptable to them and their backers.
    If they can pull a swifty on the general public and sell a pig in a poke that would be the prime option second is blaming someone else because the con job went belly up and they were sprung. Third is doing nothing of real value or use and kicking the problem down the road for someone else hopefully a future Labor government which they can then kick around.

  9. Ikonoclast
    April 4th, 2016 at 18:30 | #9

    A couple of points.

    It is not correct to say Edison invented the light bulb. The idea of “all-at-once-invention” by isolated genius is a fallacy. A great many developments and a great string of people and teams are needed to develop a technology, any technology, over time. Sometimes there are key figures for certain processes in the development of an invention. Joseph Wilson Swan, English physicist and chemist, arguably played much more of the scientific and technical role in the development of the light bulb than did Edison. It would be much nearer to the truth to say that Edison got the patent on the light bulb and drew economic rents from his “ownership” of the idea.

    On the tax issue, it appears that Mal and the Neolibs want no solutions. When apparently intelligent people politicians advance a string of stupid ideas when the right ideas stare technically competent people in the face, we can reasonably infer that this is deliberate misdirection by said politicians. They want no reforms (in the old-fashioned, progressive sense of the term) and will rant, obfuscate and filibuster so that the cows never come home, the chickens never roost etc. in the brains of the deliberately ill-educated, misinformed and misled public. The dreadful standard of government in this country is a farce rapidly becoming a tragedy.

  10. J-D
    April 4th, 2016 at 19:36 | #10

    @Ikonoclast

    It is not correct to say Edison invented the light bulb.

    Then isn’t it a good thing that John Quiggin didn’t say that?

    What he actually wrote was

    After a thousand or so failed attempts to design a workable filament and design for a lightbulb

    Not the same thing, is it?

    Although it does turn out that what John Quiggin wrote wasn’t accurate, either, in the sense that the remark under discussion was originally made not in the context of work on lightbulb design but in the context of work on the development of a new kind of nickel-iron storage battery.

    You may also be interested in the following line lifted from the Quote Investigator’s citation of the original reference from the biography by Edison’s associate Walter Mallory (with my emphasis added):

    I found him at a bench about three feet wide and twelve to fifteen feet long, on which there were hundreds of little test cells that had been made up by his corps of chemists and experimenters.

    And I think you’ll find if you look into it that it’s not correct to say, as you do, that ‘Edison got the patent on the light bulb’; it is probably closer to the truth to say that he was one of several people each of whom had a patent on a light bulb.

  11. rog
    April 4th, 2016 at 19:37 | #11

    On the second point, pre election Abbott promised to axe the tax yet retain the compensation for the tax thereby swallowing the bait hook line and sinker.

  12. rog
    April 4th, 2016 at 19:43 | #12

    Panama Papers should lay to rest *forever the trickle down concept. This should give Turnbull an opportunity to slug the rich but as he is one, and so obviously enjoys being one, the chances of this happening are close enough to zero.

    *forever being a political not philosophical term.

  13. sunshine
    April 4th, 2016 at 19:56 | #13

    @Ikonoclast
    On your first point – Yes .Another good example is Mark Zuckerburg .I’m assuming the ‘The Social Network’ movie was accurate as he didnt sue anyone. He stole/ bought / swindled/ appropriated the various elements (the (originally woman bullying) comparison element was his). Often the ‘genius’ who gets remembered is the one who pulls already existing parts together and presents them as a coherent whole. Bill Gates(via lawyers) and Sigmund Freud are also good examples of that but there are many more. Yes ‘ownership ‘ is key. There is evidence that Einstein had alot of help from his first wife- who was also, unusually for back then, a physicist. Apparently the very first registration of his first relativity paper was under both their names . There is alot invested in the idea of the lone genius.

    As to your second point – I dont think the government wants solutions or reform either .The only changes they want would push us in a direction we have already gone too far in and the public wont take any more of. So do nothing ,leave things as they are and let wealth continue to accumulate at the top anyway. In the absence of war or similar emergency going further to the (socially Conservative economically Libertarian) Right will need to be a slow process of making us more greedy and fearful by cultural engineering like John Howard did. The legislation should follow but not precede the cultural change or the project will fail as the 2014 budget did.

  14. hc
    April 4th, 2016 at 20:12 | #14

    Empirical work estimating the Mirrlees model (Saez etc) is an interesting way of thinking about the optimal MTR. It is a tough issue and I don’t share your confidence though admit you may be right. Work disincentive effects on low-income earners don’t matter much since not a lot of income is lost. On high-income earners it matters a lot since s lot of income that can be redistributed is lost if the rich don’t work or invest as much. The original Mirrlees argument – ignoring the recent embellishments – which sought to optimize efficiency jointly with equity – seems to me to make a lot of sense: set relatively high MRTs for low and medium income earners so average tax rates on the rich can be quite high. But set low MRTs on the rich so much income can be redistributed to the poor. The pool of unskilled non-earners can be supported by large transfers from the rich. I’ll be interested in seeing the numerical work you do. An example of the Saez style calculations is in Chapter 2 (I think) of the UK Mirrlees review. Calculating the highest MRT seems much simpler than getting the whole structure worked out.

  15. April 4th, 2016 at 21:00 | #15

    @hc

    Given that marginal tax rates were much higher in the 40’s, 50’s and 60’s, is there any research on how high income earners responded in those times?

  16. Ikonoclast
    April 4th, 2016 at 21:38 | #16

    @sunshine

    Re your second paragraph. Good points on what is a kind of “stasis thesis”. The rich have set up the perfect system which funnels all the money to them. Why would they want to change anything? It’s the perfect scam.

  17. hc
    April 4th, 2016 at 21:41 | #17

    @JB

    When the claim was that there were strong adverse incentive effects – particularly in the UK. I don’t know about serious empirical studies but I think investment rates in the UK were very low.

  18. Sancho
    April 4th, 2016 at 22:00 | #18

    Apart from anything else, the AHTM scramble makes “The Thick of It” so re-watchable.

    One can only imagine the profane and fevered phone calls happening in the back of commcars now the Panama stuff is out.

  19. Peter T
    April 4th, 2016 at 22:18 | #19

    @ hc

    FWIW, under-investment by the wealthy in the domestic sector is a long-standing problem in the UK. The later C19 was particularly bad – with a very large outflow of capital abroad while Brit industry had trouble modernising to face German and US competition. The usual reasons given are political rather than economic – it was not the rate of return but the fear of “socialism” aka trade unions which drove the wealthy to invest abroad. This at a time when taxes were very low. The experience lies behind Keynes eventual belief in a strong state role in directing investment.

  20. Ikonoclast
    April 5th, 2016 at 07:16 | #20

    The ABC report: “Panama Papers: Fraudsters, former tax officials among Australians identified in Mossack Fonseca leak.”

    “Convicted fraudsters, directors banned by the corporate regulator and former Australian Tax Office (ATO) officials are among hundreds of Australians linked to companies incorporated by Panamanian law firm Mossack Fonseca.”

    Corruption has become embedded and systematic in the world economic system. Corruption is now the standard state of international finance.

  21. Collin Street
    April 5th, 2016 at 07:19 | #21

    I’ll be interested in seeing the numerical work you do.

    Formal mathematical economic modelling is not actually that useful, and certainly not dispositive. Because:
    + economies, and thus useful economic models, are feedback/differential-equation systems and are thus chaotic
    + we lack sufficiently accurate information to set the model up accurately enough to overcome the chaotic effects

    Combination of “chaotic systems” and “insufficient data on structure of system” gives you “extremely unreliable results”. Your informal, qualitative gut-feel results are actually more useful, because they’re stripped of the false — erroneous — precision you get from formal models.

    I mean, if you’re dealing with a crazy economist who’s proposing some daft idea based on some fundamentally-misconceived model then some models of your own might help you temporarily overcome this, but really this is a pretty minor effect.

    [the effort made into making your model “more detailed” is pretty much useless, IOW. Unabashed toy models, the sort you can run in your head and call “intuition”, are no less accurate because the oversimplification of the model is basically never your limiting factor: “ignorance or misunderstanding of the options people have open to them” and “ignorance or misunderstanding of the process people decide between the options they have” are basically always going to have bigger effects. Note that both the ignorance you’re aware of and the ignorance you don’t know you hold are important effects, and the latter can’t even roughly be corrected for.]

  22. J-D
    April 5th, 2016 at 07:36 | #22

    @hc

    Imagine a person (maybe you; maybe me) who has control over number of hours worked.

    Now suppose that the income this person receives for each hour worked increases for some reason (maybe a cut in income tax rates, maybe something else).

    I can imagine at least two possible reactions.

    One reaction is to increase hours worked, because the increased return makes this more attractive. Another reaction is to decrease hours worked, allowing total income to remain constant but freeing up more spare time for recreational activities.

    Conversely, suppose that income received for each hour worked decreases for some reason (maybe an increase in tax rates, maybe something else).

    Again, I can imagine at least two possible reactions.

    One reaction is to decrease hours worked, because the decreased return makes them less attractive. Another reaction is to increase hours worked in order to keep total income the same, sacrificing some hours of spare time to achieve this objective.

    Which way do people actually react? If hourly rates go up, do people work more hours or fewer? If hourly rates go down, do people work more hours or fewer?

    If you build a model that starts with the assumption that lower rates of hourly return discourage people from working more (or even as much), but the opposite is in fact the case, then your entire model will be a mistake and no conclusions from it will be valid.

  23. J-D
    April 5th, 2016 at 07:58 | #23

    @Ikonoclast

    Corruption has become embedded and systematic in the world economic system. Corruption is now the standard state of international finance.

    Compare and contrast this alternative statement:

    Corruption has always been embedded and systematic in the world economic system. Corruption has always been the standard state of international finance.

    Which do you suppose is closer to being accurate?

  24. Kel
    April 5th, 2016 at 08:27 | #24

    Thanks John for a simple summation of the LNP’s fearless reform proposals of our tax system. Why is it that not one of our journalists can put the events of the last two and a half years so succinctly?

  25. Jim
    April 5th, 2016 at 09:43 | #25

    There has never been a more exciting time to be an Australian taxpayer witnessing this daily continuity and change in Coalition policy……

    It makes Utopia and Hollow Men look like documentaries…

  26. Troy Prideaux
    April 5th, 2016 at 10:00 | #26

    @Jim
    Things must be pretty toxic in the LNP at the moment. I don’t envy Turnbull. Too much dysfunction.

  27. J-D
    April 5th, 2016 at 10:06 | #27

    In your list of options the government had ruled out or killed off you didn’t mention inheritance taxes — was that option also explicitly excluded at any stage?

  28. J-D
    April 5th, 2016 at 10:10 | #28

    Any change that results in the government collecting more tax in total must mean that at least some people pay more tax, just as any change that results in the government spending less money in total must mean that at least some people receive less money from the government.

    What the government probably wants is to come up with a package with which they can disguise as much as possible who it is that is being made worse off (at least in this narrow individual fiscal sense).

  29. FREDDO
    April 5th, 2016 at 13:57 | #29

    JOHN,

    Now even RWNJs like Terry McCrann think Malcolm is a dud and going to lose the next election. You are, I must say, keeping very dubious company:

    [Saviour Malcolm Turnbull has turned out to be `a dud – and is headed for electoral defeat

    BLUNTLY, and to put it quite simply, Malcolm Turnbull is a dud.

    No, that’s not an acronym for a three-word slogan. But as “Dr Google” tells us: “A thing that fails to work properly or is otherwise unsatisfactory or worthless.”]

    http://www.heraldsun.com.au/business/terry-mccrann/saviour-malcolm-turnbull-has-turned-out-to-be-a-dud–and-is-headed-for-electoral-defeat/news-story/b58444011a0497914fa2994cae231291?from=google_rss&google_editors_picks=true

  30. Troy Prideaux
    April 5th, 2016 at 15:01 | #30

    @FREDDO
    Why would a RWNJ like McCrann or any other RWNJ be expected to support Turnbull anyway? The “lefty” who dethroned their beloved dear leader?

  31. FREDDO
    April 5th, 2016 at 15:22 | #31

    Troy: I would have thought Turnbull would be just the sort of financial spiv McCrann would love – certainly a lot more than Shorten.

  32. Troy Prideaux
    April 5th, 2016 at 15:42 | #32

    @FREDDO
    Dunno Freddo, McCrann has (for a while now) struck me as more of a RW ideolog masquerading as a business commentator. Maybe it’s coz there’s certain quota of RWNJ rants expected from any (non sporting) contributor at Rupert’s rags to illustrate their allegiance to the cause.

  33. J-D
  34. Philip Picone
    April 5th, 2016 at 16:32 | #34

    How about we reverse the distribution of tax collected, that is the States get all of the tax, seeing that they spend most of it, and get the federal government to come cap on hand to the premiers to get funds to run what they have control off. Couldn’t be much worse than what happens now.

  35. April 5th, 2016 at 17:03 | #35

    With Andrews willing to throw his cap in the ring for the leaders job, and Dennis Jensen, climate change denier, losing preselection for his safe seat, everything is lining up for a split between the rwnj’s and the slightly more sensible party.

  36. Roardinary Guy
    April 5th, 2016 at 23:08 | #36

    I know it’s off-point, but George Christensen calling you Professor Quiggin “an absolute leftie economist” – that’s got to go in your testimonials on the right, hasn’t it?

  37. J-D
    April 6th, 2016 at 07:47 | #37

    @Philip Picone

    The States don’t want to collect income taxes. They’ve made that abundantly clear — just as they have done on other occasions in the past when the idea has been floated.

  38. Ikonoclast
    April 6th, 2016 at 08:45 | #38

    I guess the state income tax idea is already dead so this post is a bit belated. The idea made no sense to me. We have one national income tax law system (combined with other tax laws) and it is horribly complicated now. How would six (or more) horribly complicated income tax systems help us?

    A while ago, I found an old J.Q. post which unfortunately I can’t find again. It summed up the tax situation very well. IIRC, it mentioned getting rid of all the economy distorting subsidies we currently have like negative gearing, fossil fuel subsidies, superannuation subsidies (deductions) and fuel subsidies. Getting rid of these alone would make an enormous improvement to our budget bottom line. Then, as J.Q. and E.G. have said, taxing high income and high wealth (maybe by death duties) would also greatly assist.

    The solutions are obvious. When people, like Mad Malc and the LNP, don’t see obvious solutions it’s because they don’t won’t to see them. They will say and do anything to divert attention away from the clear, easy solutions staring us in the face. The reason for these diversions is clear. They (the neolibs) like the system exactly the way it is. It neatly funnels most wealth to the tiny minority of very rich people and very effectively keeps it ensconced there. They have the system pretty much jigged the way they want it except that they want to keep going until taxes are zero or negative on rich people and corporations and wages and conditions for workers are pushed down to bare survival levels.

  39. Ikonoclast
    April 6th, 2016 at 08:56 | #39

    Slight typo in above post. I wrote “don’t won’t to” when I meant “don’t want to”.

    And a little, additional thought. It seems to me that it’s a standard neoliberal tactic, when they don’t want to consider or do something, to pretend that it’s “too hard”. It reminds me of the toddler on the supermarket tiles kicking and screaming because walking is too hard. Never mind that kicking and screaming expends about four times the energy of walking quietly. The neolibs kick and scream and say tax reform is “too hard”. If the job is too hard for them then they have to be booted out. Get someone who can do it.

  40. J-D
    April 6th, 2016 at 10:27 | #40

    @Ikonoclast

    It’s a standard tactic of everybody who doesn’t want to do or to consider something to aver that it’s too hard.

  41. Troy Prideaux
    April 6th, 2016 at 11:07 | #41

    @J-D
    Indeed. If there’s any silver lining to come out of the whole fiasco for the Federal Government, it might be a future comeback to states who whinge about GST distribution – “well, we offered you this…”

  42. Ernestine Gross
    April 6th, 2016 at 11:35 | #42

    Democracy works in an explict manner – because it can due to the small ‘country’ in term of population.

    The Panama Papers revealed that the wife of the now then existing Prime Minister had off-shore companies.

    The Prime Minister looked out the window on the following day and saw suffient evidence to conclude that no vote had to be taken on whether or not he should resign.

    He offered his resignation.

  43. John Bentley
    April 6th, 2016 at 12:15 | #43

    Maybe we should be calling this election a reverse election where the winner gets the poisoned chalice and thus becoming the loser and the loser declared the winner by default, or whatever.

    I agree with John, basically, our highest tax rate needs to be raised. I also believe that we need something in the order of an environmental tax (consumptive??) levied at the source. This will help the government’s bottom line and help to bring our carbon emissions into line. Mind you, any hope of keeping global warming to below 2 degrees Celsius has, in my opinion, long disappeared out the window!!

  44. Ikonoclast
    April 6th, 2016 at 14:03 | #44

    @Troy Prideaux

    The offer was intentionally absurd. Its corollary, which Turnbull has now made explicit, is this.

    “The states won’t take responsibility for income tax, therefore tax reform is impossible.”

    Only in an alternative universe, the Turnbullverse, would this statement make any sense.

    He is an aptly named fellow: a man with a turn for bull.

    Malcolm is apt too. From Wikipedia: “Malcolm, Malcom, Máel Coluim, or Maol Choluim is a Scottish Gaelic given name meaning “devotee of Saint Columba”.

    In turn; Saint Columba (Irish: Colm Cille, ‘church dove’;[a][1][2] 7 December 521 – 9 June 597) was an Irish abbot and missionary credited with spreading Christianity in what is today Scotland at the start of the Hiberno-Scottish mission.”

    So Malcolm is a follower of the Abbot(t). QED. 😉

  45. Troy Prideaux
    April 6th, 2016 at 14:31 | #45

    @Ikonoclast
    I don’t know if I’d go as far to say it was intentionally absurd. The broad argument was put that those who spend the money (state governments) should be the ones raising it. Whether that’s practical or not or fair or not or efficient or not I don’t know, but I can see the conceptual appeal to some and there’s an odorous scent of “that’s more work for us, so… no, it’s all too hard” that appears to be a central tenet of state government ops.

  46. Ikonoclast
    April 6th, 2016 at 17:22 | #46

    @Troy Prideaux

    A “courageous” Federal Government would go the other way. But I can see political pitfalls there too.

    PM – Okay, we’ll take over all the public hospitals and run them ourselves.
    [The rest of the conversation is sotto voce.)
    Advisor – That’s a courageous decision, PM.
    PM – What? How courageous?
    Advisor – Veeeery courageous.
    PM – Very courageous? Oh, dear. How do I back-flip now?”
    Advisor – You don’t have to. Everyone thought you were joking.
    PM – They did? Wonderful! What a splendid idea to hold this meeting on April 1st!

  47. April 6th, 2016 at 18:17 | #47

    After watching Four Corners on tax havens it seems that unless we fix them, there is no need to worry about taxing high income earners at a higher rate, rather just taxing them at all.

    Do the “entities” in tax havens buy, say, houses in Australia, and then let certain people live in them rent free? Or else how do you use the funds you’ve salted away in a tax haven?

  48. Troy Prideaux
    April 6th, 2016 at 19:28 | #48

    @John Brookes
    See comment #1

    If you raise the upper marginal income tax rates, that just means more “minimisation” and will definitely raise buggerall money unless you crack down on NG, super concessions, CG concessions and offshore evasion which is far more prolific than is being assumed IMHO.

  49. April 6th, 2016 at 19:37 | #49

    @Troy Prideaux
    But my problem is I don’t understand how tax evasion works.

    Say I’m running a successful business here, making a profit. So I set up a fake company in a tax haven which lends my business money at usurious rates. So my business no longer makes a profit – great, it doesn’t have to pay tax. The business in the tax haven makes a profit, and pays some low or paltry rate of tax.

    So how do I get my money back from this business? If it sends me the money, don’t I have to declare it as income? Exactly how do I get that money back without paying any tax on it?

  50. Troy Prideaux
    April 6th, 2016 at 19:57 | #50

    @John Brookes
    That’s how companies do it (inter company lending), I’m not sure about individuals? I know there are lots of trusts and bogus entities with the primary purpose to create such complication that it’s impossible to follow the trail without throwing impractical resources at it.

  51. April 6th, 2016 at 23:39 | #51

    @Troy Prideaux
    I still don’t get how they end up with the new house or boat or whatever. How do they spend that money without anyone asking where it came from?

  52. paul walter
    April 7th, 2016 at 02:14 | #52

    Anyway, since when did anything like common sense have anything to do with it?

  53. Collin Street
    April 7th, 2016 at 07:08 | #53

    So how do I get my money back from this business? If it sends me the money, don’t I have to declare it as income? Exactly how do I get that money back without paying any tax on it?

    You move to London, where the government doesn’t check those sorts of things.

  54. Collin Street
    April 7th, 2016 at 07:11 | #54

    Whether that’s practical or not or fair or not or efficient or not I don’t know

    Then maybe you shouldn’t try and make judgements that rely on knowledge you know you don’t have.

  55. Ikonoclast
    April 7th, 2016 at 07:16 | #55

    @John Brookes

    In the late 1980’s there was an hilarious American sitcom called “Sledge Hammer”. (Yes, I know it is amazing that there actually was an American sitcom which was funny.) Sledge Hammer was a completely over-the-top cop, like a caricature of Dirty Harry and Lethal Weapon’s, Martin Riggs (Mel Gibson) combined.

    In one episode, Sledge Hammer broke into the Police Commissioners house (I forget his “probable cause”). Once he had broken in, he could see it was a mansion filled with super expensive stuff. He immediately snarled;

    “Any Police Commissioner with this much stuff HAS to be on the take!”

    This show aired in Qld. not long after Police Commissioner Terry Lewis’s conviction. Suffice it to say, Sledge Hammer’s statement had me in stitches.

    My long-winded point is that it is official corruption which allows organised criminal enterprise to flourish in cases where ordinary citizens can easily see the crimes, or their results, and the ill-gotten gains being flaunted. Official corruption can exist among both politicians and high-ups and also among the rank and file of any public institution.

    So in Sledge Hammer fashion we would have to say;

    “Any system which allows this much secret money to be stashed away, avoiding both taxes and questions about where the money comes from, HAS to be corrupt.”

    The world system is corrupt on a massive scale. There clearly is little official will or intent to clean it up. I am beginning to understand Julian Assange’s philosophy. He basically says official secrecy is the problem. The key to getting change is to expose as many official, and business, secrets as possible. Wikileaks and the Panama Papers investigation exemplify this. As E.G. pointed out in relation to Iceland, this brings people out into the streets and squares. In a peaceful democracy this can bring a PM down by resignation. Of course, in other types of regimes it gets you machine-gunned. Still, the basic principle is sound. Official and big business secrets must all be exposed. It’s the only way. Then the people know what is really going on and then the people tend to get highly indignant about the exposed injustice and unfairness of most societies.

  56. Troy Prideaux
    April 7th, 2016 at 08:12 | #56

    Collin Street :
    Whether that’s practical or not or fair or not or efficient or not I don’t know
    Then maybe you shouldn’t try and make judgements that rely on knowledge you know you don’t have.

    And what judgement was I making? I was simply stating that I could see how some people might see the appeal in it.

  57. J-D
    April 7th, 2016 at 08:16 | #57

    @John Brookes

    I’ll take a wild guess and say that it happens the same way anybody ever spends money without people asking where it came from. When I bought my dinner yesterday nobody asked me where the money came from; when I bought the car I now drive nobody asked me where the money came from; when I bought the unit I now live in nobody asked me where the money came from; when I bought my daughter’s most recent birthday present nobody asked me where the money came from; when I pay my ISP nobody asks me where the money comes from.

  58. Troy Prideaux
    April 7th, 2016 at 08:26 | #58

    John Brookes :
    @Troy Prideaux
    I still don’t get how they end up with the new house or boat or whatever. How do they spend that money without anyone asking where it came from?

    Well, I can’t see why they couldn’t borrow the money from an entity/company OS that they might happen to own for instance and funnel funds into via other OS entities. So long as the trail is sufficiently obscured so the entity lending the money can’t be tied to the borrower?

  59. Ikonoclast
    April 7th, 2016 at 08:29 | #59

    @J-D

    Try putting over $10,000 in cash into your bank account.

    “Under current Federal legislation, all Australian banks are required to report cash transactions
    of $10,000 or more (or foreign equivalent), including details of the relevant account holders, to
    the regulator, the Australian Transaction Reports and Analysis Centre (AUSTRAC). From 1
    October 2011, new rules are introduced that requirembanks to collect information, record and report on the identity of anyone performing a cash transaction of $10,000 or more to AUSTRAC.” – ABA Fact Sheet.

    Unusual transactions are checked. At the high end, it is easier to hide unusual electronic transactions than unusual cash transactions. Institutional corruption also become an issue at that level. Institutions start to “look the other way” and not see things or even to participate and profit in some way or other.

    Nobody cares about your or my purchases. We are small, mostly honest fry. Medium crooked fry sometimes get fried. Big crooked fry corrupt institutions and get away with it. That’s the current way of the world.

  60. J-D
    April 7th, 2016 at 10:19 | #60

    @Ikonoclast

    If you want me to try putting over $10,000 in cash into my bank account, you are first going to have to give me $10,000 in cash. It wouldn’t prove anything relevant, though. The question John Brookes asked was about how people spend money without anybody asking where it came from. As I mentioned above, I’ve spent money many times, large amounts as well as small ones, without anybody asking me where it came from. It’s possible to spend money, large amounts as well as small ones, without any cash transactions and, indeed, without using bank accounts at all.

    The sum of money that was deposited into my bank account when my mother’s estate was settled was in excess of $10,000, and nobody asked me any questions about it. Of course it wasn’t in cash, but that’s precisely my point. Most deposits into bank accounts, especially the large ones, are not cash transactions, so your reference to the rules about reporting of large cash transactions has no relevance to this discussion.

  61. Ikonoclast
    April 7th, 2016 at 14:28 | #61

    @J-D

    John Brookes asked about how people spend money without anybody asking where it came from. Clearly, in context, he was asking about seriously large amounts of money. What you or I might call a “large amount of money”, I suspect a seriously rich person would call pocket change. For example, a seriously rich person would call US$ 1 million pocket change. They would scarcely even allow that US$10 million was a significant sum though they would grant it was useful for minor, sundry expenses of their lifestyle.

    I suspect that if sums of US$ 10 million or even US $1 million started going in and out of my account electronically and regularly at my local retail bank in Brisbane, then these transactions would be flagged. I gave the example where cash would be flagged. It is a reasonable assumption that there is a higher level where electronic transactions will be flagged and checked especially when they start forming additive patterns.

    John Brookes’ question is actually a perceptive and interesting question. It appears some people can stash a lot of money secretively in off shore tax havens. This money might well be from illegal activities and/or be placed there to illegally avoid tax obligations. The money placed there is (relatively) safe and secret. The next question is how do they spend such money safely and secretively? As you illustrate “small change” of say up to a million dollars can be spent openly and safely enough by most ordinary people, if they have it. The issue changes, I would say, for amounts of ten million to a hundred million… and more. Presumably, this off-shore and shadow banking system runs through other off-shore and shadow spending accounts as well as holding money in shadow accumulation accounts. Thus, I assume there are shadow channels where this money can be spent relatively safely and secretly. There are all sorts of money laundering schemes too.

    In short, John Brookes’ question is a logical one and it is not answered by saying “little people who spend less than a million don’t get checked therefore nobody openly spending tens or hundreds of millions without an apparent income source will get checked either”. That “reasoning” simply does cut it.

  62. Zucchini
    April 7th, 2016 at 15:30 | #62

    Estate and property taxes are much more sensible taxes than raising income taxes. Taxing income has a disincentive effect on work. Even if it is quite small, it’s still bad. Taxing estates and property can only make the economy more efficient. In particular, lower property prices will make the economy more efficient and more stable.

  63. April 7th, 2016 at 16:28 | #63

    I guess I’m asking for information on how it is actually done. That is, what are the most common ways used by people to get money out of a tax haven so that it can be spent? And logically it follows that I want to know how this gets past the ATO.

    Obviously juicy gossip is preferable to generalisations here. Like, apparently the bankrupt Bond family bought a village in England. How?

  64. zoot
    April 7th, 2016 at 17:46 | #64

    @John Brookes
    I am told our Prime Minister has a rather large stash in the Caymans. Perhaps we should address your questions to him? 🙂

  65. Collin Street
    April 7th, 2016 at 19:24 | #65

    That is, what are the most common ways used by people to get money out of a tax haven so that it can be spent?

    The money is not spent. Or rather, not consumed; it’s “invested”, which means it’s spent buying things of lasting value, making “investments” that return even more money.

    The thing you have to remember is that the whole point of getting Very Rich isn’t to provide you with the tools you need to engage in a lot of consumption, because the amount of money you can actually usefully burn through tops out at well under a million a year. Any income above this level isn’t driven by lifestyle desires but by, well, basically one-upmanship and control and what-have-you, a desire to accumulate money for the purposes of “being rich”.

    Money spent that way, money spent controlling others, can’t be trivially traced back to the beneficial owner the way conventional consumption goods are.

  66. Ikonoclast
    April 7th, 2016 at 20:33 | #66

    Collin,

    I cannot entirely agree with you. You say “the amount of money you can actually usefully burn through tops out at well under a million a year”.

    This of course depends on the definition of “usefully” but billionaires can and do “burn through”, that is consume rather than re-invest productively, far more than a million a year. Apparently some billionaires spend say $50 million on a yacht. Actually these things look like a cross between an incredibly giant speed-boat and a cross channel ferry. So that is at least $50 million of what such a person would call useful spending in a purchase year. The yacht’s utility is valued by that person above having that $50 million in say an account or a business. As super-yachts go, a $50 million one is a tiddler. In the world of “my super yacht is bigger than yours” the biggest super yachts probably cost about $500 million to $1.5 billion. Nobody, except a few multi-billionaires, ships brokers and manufacturers, knows for sure as the prices are confidential.

    But overall, I thought I had given a reasonable general explanation above. It follows that if there are shadow off-shore “stash” accounts there are also other shadow parts of this network for moving money step by step to places where it can be fraudulently accounted for and/or laundered. Then it is moved on to where it might be spent with all the appearance of being legitimate wealth of some kind.

    People can always read this.

    http://www.businessinsider.com.au/beginners-guide-to-money-laundering-2014-10?r=US&IR=T

  67. Ikonoclast
    April 7th, 2016 at 20:48 | #67

    People might find this site interesting. It bills itself as an organisation dedicated to fighting illicit financial flows.

    http://www.gfintegrity.org/about/

  68. April 7th, 2016 at 21:26 | #68

    @Collin Street

    But what if you feel the sudden desire for a $10 million dollar property? How do you buy it?

  69. Collin Street
    April 8th, 2016 at 06:42 | #69

    You buy it through a succession of blind trusts over seven juristictions. If you want to use it you arrange layers of subleases each through separate chains of trusts, and then you borrow money through a third chain of trusts to pay for it all.

    You pay some tax, but because the bulk of the ownership is abstracted from you the bulk of the tax burden is too.

  70. Ivor
    April 8th, 2016 at 08:35 | #70

    Ikonoclast :
    People might find this site interesting. It bills itself as an organisation dedicated to fighting illicit financial flows.
    http://www.gfintegrity.org/about/

    Good link. As the site says:

    illicit financial outflows—facilitated by secrecy in the global financial system—are bleeding developing countries dry.

    While there may be tricky tax benefits with offshore arrangements, these can be dealt with by tax agreements between jurisdictions. If I pay no tax on European income, I still must report it on my Australian tax return.

    The real benefit of offshore havens, seems to be the secrecy they provide.

    You only have a true market system when everyone has the same information – this includes information on different incomes.

  71. Ivor
    April 8th, 2016 at 08:35 | #71

    Ikonoclast:
    People might find this site interesting. It bills itself as an organisation dedicated to fighting illicit financial flows.
    http://www.gfintegrity.org/about/

    Good link. As the site says:

    illicit financial outflows—facilitated by secrecy in the global financial system—are bleeding developing countries dry.

    While there may be tricky tax benefits with offshore arrangements, these can be dealt with by tax agreements between jurisdictions. If I pay no tax on European income, I still must report it on my Australian tax return.

    The real benefit of offshore havens, seems to be the secrecy they provide.

    You only have a true market system when everyone has the same information – this includes information on different incomes.

  72. Ivor
    April 8th, 2016 at 08:42 | #72

    @John Brookes

    You borrow 95% and rent it out so that tenants purchase it for you, and you escape tax because of negative gearing.

    You are able to purchase property for 10 million if you previously demonstrated ability to purchase property for 1 million.

    So all budding capitalists should start young and vote for, and fund, capitalist politicians who will continually boost the population to guarantee your rents.

  73. Xevram
    April 8th, 2016 at 08:46 | #73

    Whatever happened to stating a vision, setting a direction and being bold and fearless along with it. No guts no Ferkin glory, sometimes leaders and Goverments need to recognise that what is right, whilst it may not be popular is in fact the right thing to do. A price on carbon, controls on tax avoidance at all levels, legislate to eliminate corruption again at all levels. Do something, just do not do nothing, even it ends up wrong at least you learnt something from it. For me, being a Territorian, the hippo in the corner is all things Indigenous, nothing, zip, nada on any policy with that…………..beyond shame.

  74. BilB
    April 8th, 2016 at 08:57 | #74

    John Brookes,

    The money passed to the tax haven shell is entered as capital for which there is no tax payable. The money can be withdrawn by the tax cheat invisibly by both juridiction and paid directly into credit cards which are not tied to the persons general bank accounts. Money paid to the tax haven company can be for “service fees” invoiced but are entered in the haven books as capital, and that is the point of deception.

    Climate change is a God send (or as we niw know a man send) for tax cheats.

    The one real laundering that I know of involved a Cook Islands cyclone which wiped out most of the coconut trees. So a retrospective coconut husk business was created into which one person I know put $270,000 dollars which was quickly written off with the supposed collapse of the business, and the money was later recovered by various means. Lawyers play a very large role in money laundering.

    The way that works is co-operating lawyers in different countries who hold monies that people want to have become invisible can disburse that amount in other countries. I once witnessed a guy open a bag with $45,000 that he had just picked up from a lawyers office. The source funds which were the proceeds from opal sales were given to a law office in Europe. The lawyers collect a fee while servicing another person’s interests, I don’t know how that part works fully.

    One of the reasons why private industry can seem to be more “efficient” than government enterprises is that they can lie, cheat, defraud and steal, things which fully audited enterprises cannot do.

  75. BilB
    April 8th, 2016 at 09:05 | #75

    Collin Street,

    Thanks, all good things to know, and you are right about motives. Those who use stolen funds gor consumption are the ones whocusually get caught out. Consumption is conspicuous.

  76. J-D
    April 8th, 2016 at 10:47 | #76

    @Ikonoclast

    You gave an accurate account of rules for the reporting of cash transactions.

    I pointed out (correctly) that rules applying to the reporting of cash transactions aren’t relevant to non-cash transactions.

    There were (at least) two ways you could have responded to that.

    One way would have been along the general lines of ‘You’re right, the rules about cash transactions don’t apply, but, you know what, maybe the general point is still valid; maybe there are also rules about the reporting of non-cash transactions, although I can’t be sure how much relevance they might have without checking into it further’.

    The other way would have been along the general lines of ‘Well, my general point is so obviously valid that it must be the case that there are also relevant rules about the reporting of non-cash transactions; there must be, even if I don’t know anything about them specifically’.

    You don’t mention having made any effort to check what rules there might be about the reporting of non-cash transactions. If you had, it might have provided useful additional information for this discussion. It might have proved that your basic point was right. On the other hand, it might possibly have proved that you were wrong. Not checking for additional information guards you against the possibility of finding out that you’ve been wrong.

    You seem to have assumed (on the basis of no information that I know of) that I am one of ‘the little people’ and not ‘seriously rich’. Maybe you’re right about that, but then again maybe you’re wrong. You haven’t asked me anything about, for example, how much money I spent on my car, or my home, or my daughter’s birthday present (I gave no descriptive information), or about how much money was deposited into my bank account when my mother’s estate was settled (I mentioned that it was more than $10,000, but not how much more). Not asking me for any more information about my financial experience also has the effect of guarding you against the possibility of finding out that you’re wrong.

    For me, finding out that I have been wrong can sometimes be an uncomfortable experience, but it’s always a valuable one. If I have been wrong, I want to find out about it so that I can stop being wrong. When I read your reference to the rules about reporting of non-cash transactions which you had to assume existed for you to be right, one of my first reaction was to wonder what the facts were and how easy they might be to discover, and I actually began searching for information on the subject. It turns out that it’s easy to find some, although if I kept trying I might learn that there were more details that were harder to find. But it seems as if you don’t have the same kind of reactions that I have.

  77. J-D
    April 8th, 2016 at 11:46 | #77

    @Zucchini

    Taxing income has a disincentive effect on work.

    Does it? How do you know?

    Imagine a person (maybe you; maybe me) who has control over number of hours worked.

    Now suppose that the income this person receives for each hour worked increases for some reason (maybe a cut in income tax rates, maybe something else).

    I can imagine at least two possible reactions.

    One reaction is to increase hours worked, because the increased return makes this more attractive. Another reaction is to decrease hours worked, allowing total income to remain constant but freeing up more spare time for recreational activities.

    Conversely, suppose that income received for each hour worked decreases for some reason (maybe an increase in tax rates, maybe something else).

    Again, I can imagine at least two possible reactions.

    One reaction is to decrease hours worked, because the decreased return makes them less attractive. Another reaction is to increase hours worked in order to keep total income the same, sacrificing some hours of spare time to achieve this objective.

    Which way do people actually react? If hourly rates go up, do people work more hours or fewer? If hourly rates go down, do people work more hours or fewer?

    How do you tell?

  78. BilB
    April 9th, 2016 at 15:18 | #78

    Where tax havens are not available there are other methods for making incomes disappear. In China there are invoice venders. These people manufacture invoices for different and sell them by the bag. It is well known that Chinese businesses run two sets of books. on e for the government or supervising authorities, and one for their personal wealth calculation and to present when selling a business.

    http://www.nytimes.com/2015/09/11/opinion/how-to-cheat-on-taxes-in-china.html?_r=0

    This is what we are competing against costwise.

  79. Ikonoclast
    April 9th, 2016 at 19:09 | #79

    J-D,

    Not asking you for any information about your financial experience had the effect of guarding me against being impertinent. I didn’t even think of doing it.

    As is the case so often, Wikipedia is our friend.

    “Australian Transaction Reports and Analysis Centre (AUSTRAC) is an Australian government agency, established in 1989 under the Financial Transaction Reports Act 1988[2] and continued in existence under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act). The agency is Australia’s financial intelligence unit to counter money laundering, organised crime, tax evasion, welfare fraud and terrorism.[3] AUSTRAC’s head office is in Sydney, New South Wales.

    Certain classes of financial services must be reported to AUSTRAC, in particular bank cash transactions (i.e. notes and coins) of $10,000 or more. AUSTRAC passes the information it collects on to law enforcement, revenue, regulatory, security and other agencies.

    “Reporting entities” are required to report transactions to AUSTRAC. Transactions which must be reported are:

    – Currency transactions of $10,000 or more, or foreign currency of that value.
    – International funds transfer instructions, either into or out of Australia, of any amount.
    – Suspicious transactions of any kind; being transactions the dealer may reasonably suspect of being part of tax evasion or crime, or might assist in a prosecution.

    I am fairly sure that the data matching routines, algorithms and triggers used for flagging “suspicious transactions” would be a bit of a secret kept in-house at AUSTRAC and for good reasons. So, I wouldn’t feel hopeful of finding out deeper information about that as an ordinary member of the public. I don’t propose to research it any further anyway.

    What is concerning is how little our authorities check on shell companies according to this research.

    https://www.griffith.edu.au/business-government/centre-governance-public-policy/research-publications/?a=454625

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