While I’m on the topic of tax and public expenditure, this is a good opportunity to refute some spurious claims made by Peter Saunders of the CIS in a piece in the Oz recently. This isn’t too hard, since the claims have been made quite a few times before, and I’ve refuted them quite a few times previously, a task that becomes a bit frustrating after a while.
First, Saunders says
The top tax bracket was worth 15 times average earnings in 1960; nine times average earnings in 1970; three times average earnings in 1980; but is just 1.3 times average earnings today.
As I pointed out in my 1998 book Taxing Times
The tax reforms of the 1980s abolished the old top tax bracket, for which a marginal tax rate of 60 per cent was applied. An inevitable effect was that the former second-highest rate now became the top rate, even though it was lowered from 49 per cent to 47 per cent. Hence, even though taxes on high and middle incomes have been cut, the top marginal rate is now reached at a lower income, expressed as a proportion of average weekly earnings.
Even sillier comparisons are made with the tax system applicable in the 1950s. For example the Treasurer, Mr. Costello argues for reform on the basis that, in the 1950s, only people with incomes equal to 19 times average earnings paid the top marginal rate of taxation, whereas today people with incomes equal to one and half times average earnings pay the top rate. The ratio of tax revenue to GDP has, of course, risen since the 1950s, in Australia as in every other developed country. But the dominant effect arises from reductions in the progressivity of the income tax system. The current income tax system contrasts dramatically with that of the 1950s which had 29 brackets and a top rate of 67 per cent. Obviously in a system with so many brackets, very few people will have in incomes in the highest bracket.
The Parliamentary Library has a useful article on this topic, which shows how the increase in proportions paying the top rate was mainly driven by the reduction in the number of brackets. More detailed info is available from NATSEM (PDF file). Combining this with AWE data, I estimate that the 47 per cent rate applied at around 1.2 times Average Weekly Earnings in 1974 and about 1.4 times average weekly earnings in 1984, scarcely any different from today.
The main difference was in the very high rates applying to high incomes (the real target of Saunders’ concern, I suspect). The top rate in 1974 was 67 per cent, and it did not apply until income reached 40 000 per year, 5 times the threshold for the 48 per cent rate. Upper-income earners were taxed much more heavily in the past than they are today (though of course it’s necessary to take account of avoidance and evasion when considering actual rates of tax).
Second Saunders compares rates between countries saying
Not only does our top rate cut in too low – the rate itself (48.5 per cent including the Medicare levy) is much too high. In Britain it is only 40 per cent; in Germany it is 45 per cent (and coming down).
But this ignores the impact of payroll taxes and social security contributions. Australia has low payroll taxes and no separate contribution to social security[1]. By contrast, in most of the other countries mentioned by Saunders, these taxes are large. In Germany, for example The employer and employee each make a contribution of 21% (2004)This point has been made so often it’s hard to believe that Saunders is unaware of it.
fn1. It’s also necessary to take account of compulsory superannuation contributions in Australia. But unlike social security schemes in other countries, this is pure forced saving – there is no pooling of contributions in the accumulation schemes that are now standard (except for politicians). So although there’s compulsion used here, it should not be regarded as taxation.
John Quiggin 
So how many times average earnings did you need to earn to pay about 47% in 1960?
A good question, but hard to answer. I’ll try and tackle the question for the 1980s, where data should be more comparable.
Thanks for prodding me on this Tom. I have now got reasonably good info on this back to 1974. If you have an AWE estimate for 1964 lying around, the NATSEM paper shows the tax scales.
“It’s also necessary to take account of compulsory superannuation contributions in Australia… unlike social security schemes in other countries, this is pure forced saving… So although there’s compulsion used here, it should not be regarded as taxation.”
I’m afraid the reasoning is wrong. Remember how government drawings from these funds are described as charges rather than taxes? There are problems of description.
Regardless of the fact that the funds notionally remain connected with the payer, and so a notional savings scheme, there are these aspects:-
– As with taxes, they are unrequited payments, in that what you put in bears effectively no relationship to what you get out (the governments and find managers between them apply the funds to so many other things dow the years, and we face such uncertainty of employment and constraints upon fund membership, that we must prudently assume that we will never see any one payment again and should treat any return as a windfall).
– In all immediate senses – impact senses – we respond to the withholdings as to taxes. Ultimate returns are analogous to incidence, but these are so far removed from immediate impact that people’s behaviour is indistinguishable from that imposed by taxes.
Forced savings of this sort qualify as taxes under the duck test – it quacks like a duck, it waddles like a duck, I sure am glad I didn’t step in that damned duck.
I’ve always thought the “top tax bracket is x times average earnings” argument was weird. If that’s what’s important we could try making them happy by making the tax on over $1 million 50 cents rather than 47 (or 48.5 if you want to include Medicare). It’s just so obvious this measure is irrelevant that I don’t know why they bother.
My impression is that I’m paying a higher effective marginal rate in this part of America than I would in Australia. Between Federal income tax (33%), Social Security (6%), Medicare (2%), State income tax (7%) and state ‘insurance’ (2%) I’m paying 50% which is more than anyone pays in Australia. This isn’t to argue tax rates are too high here, rather than Australian rates really are low if they are lower than *American* rates.
Re:
Saunders compares rates between countries
. . .
But this ignores the impact of payroll taxes and social security contributions. Australia has low payroll taxes and no separate contribution to social security1. By contrast, in most of the other countries mentioned by Saunders, these taxes are large.
Don’t payroll taxes/social security contributions cut out above a certain level of income, at least in the UK? And I don’t think they ever apply to capital income. So doesn’t the comparison about top marginal rates stand, at least for those who will be in the top bracket in any country? (Unless the UK and Germany don’t have dividend imputation, or whatever it’s called – deducting company tax paid from the income tax payable on dividends.)
Declan, I’d say that the top rate is the highest rate paid by anybody, not the rate paid by the highest income earners. So the existence of a cutoff merely means that the tax system is more regressive (unless the SS contribution cuts out at a rate lower than the threshold for the top marginal rate of income tax).
As you say, capital income is more complicated. But since the whole debate is about average weekly earnings, and since Saunders refers repeatedly to earnings, workers and wages, I think it’s reasonable to focus on labour income.
Debating points about where the highest marginal tax rate cuts miss the real issue completely. If that was the problem, it could be easily fixed by creating a new highest tax bracket of 60c, and making it cut in at $1million, which would be 20 times average weekly earnings.
But since that would hardly affect anybody, it wouldn’t change anything of substance in the income tax system.
The real issue is whether it is good or bad for someone with an income (net of deductions) of $62000 to be paying 48.5c in income tax on the extra dollars that they earn.
I disagree with your comment that super is not tax.
True, it is hypothicated… but even then I don’t have huge faith that the super system will not change sometime between now and my retirement (some 40 years according to the government, though I plan on it being much earlier).
Milton, I agree that the real issue the one you point to, but it wasn’t me who raised the debating point.
Saunders’ point is invalid in precisely the way you suggest, except in reverse order. The 66 cent rate applying to a small number of earners was removed, making the 47 cent rate the top rate.
Saunders gives no real evidence of damage caused by high rates, and the experience of NZ suggests that any such damage must be small.
John H, I agree there’s some ambiguity here. It’s also important to consider tax expenditures and things like the levy that force high-income earners into health insurance. There’s no sharp divide between taxes and other uses of government power to drive economic behavior.
But allowing for all of this complexity, I think it’s clear that Saunders’ claim that Australia has unusually high marginal rates of tax cutting in at unusually low levels doesn’t stand up.
John,
Of course I am not “unaware” of social security contributions in other countries (I actually discuss this explicitly in my latest CIS paper, “Tax reform to Make Work Pay”, co-authored with Barry Maley). The point is they are nowhere near as significant as an addition to top tax rates as you seem to think.
Compare Austalia with the UK (hardly a low tax country):
(a) The Brits pay no tax on the first UKL4,615 of earnings – a tax-free threshold equivalent to $11,538 – almost double our paltry $6,000 tax free threshold.
(b) They then pay 10% on the next UKL1,960, and 22% thereafter (as compared with our 17$ and 30% rates)
(c) They pay an 11% employee national insurance contribution on all earnings taxed at the 22% rate (roughly between $11,500 and $77,000), so we can say their ‘real’ marginal rate in this income band is 33%.
(d) The British top rate cuts in at 30,500 pounds (around $77,000) – even after yesterday’s budget, ours will still cut in at $70,000.
(e) The British top tax rate is 40% – ours is 47% plus 1.5% Medicare levy.
(f) Their employee national insurance contribution is only 1% on all income above $77,000, so their “real” top rate of tax is 41% as compared with our 48.5%.
Conclusion: We tax higher income earners much more highly than the Brits do, and our low-to-middle income earners are still worse off than their British equivalents, even taking account of NI contributions, because our tax-free threshold is so much meaner than theirs.
You can argue about whether you think people on $70,000 should lose almost half of every extra dollar they earn, but there can be no argument that these people are losing much more in Australia than they would in the UK, the US, Canada, New Zealand, Japan….
Regards
Peter Saunders
Comparing UK income and tax scales with Australian ones at market exchange rates seems to me to be highly misleading. My observation is that, in the south of England at least, 1 pound buys you what 1 Australian dollar buys you here.
So if the top British rate cuts in at 30,500 pounds, that would be like the top Australian rate cutting at $30,500 , not $77,000.
This makes them look like a high tax country compared to us. Maybe this explains why UK tax revenue is over 40% of their GDP and ours is 30%.
Even accepting the exchange rates he uses, I don’t think Peter Saunders can justify the claim that:
‘our low-to-middle income earners are still worse off than their British equivalents, even taking account of NI contributions, because our tax-free threshold is so much meaner than theirs. ” Our 17 cent range extends to 21600 whereas the British rate rises to 33 per cent at about 13000. The difference over this range more than wipes out the benefit from a higher tax-free threshold.
On the whole, though, I’d agree that the British scale is less progressive than Australia’s, and of course the British VAT rate is 17.5 compared to Australia’s 10, making for a substantially more regressive tax system overall. Not surprisingly, inequality has grown substantially in the UK under this system.
Another place all this gets muddied is when politicians of all persuasions pretend only federal taxes count. But what counts is what hits taxpayers, not just which vulture is gnawing their livers.
I’ve just remembered why I so rarely bother posting on this website! You get attacked, you show why the attack was wrong, then your attacker moves the goal posts. Just to set the record straight:
(1) JQ originally said my claim that the top rate is higher here than in other countries “ignores the impact of payroll taxes and social security contributions. Australia has low payroll taxes and no separate contribution to social security. By contrast, in most of the other countries mentioned by Saunders, these taxes are large…This point has been made so often it’s hard to believe that Saunders is unaware of it.”
(2) PS then replies showing that national insurance contributions in the UK add just 1% to the top marginal tax rate, taking it to 41% – still 7.5% below Australia’s.
(3) JQ responds to this saying UK has a less ‘progressive’ system than we do which makes it more unequal. But this is mere tautology. If they tax top earners more leniently than we do, of course their top earners retain more of their earnings, so the gap between them and lower earners will be greater!
The issue I was addressing was factual, not normative. It is not true, as JQ claimed, that social security contributions in Britain negate its lower top tax rate. Whether you like the results or not is a different question. If we get the facts straight, we can then have a debate about which system is preferable – but please stop denying that we are taxing our higher earners more viciously than other countries with whom we often compare ourselves and with whom we interchange workers (the UK, NZ, Canada, USA as well as all the Asian countries and quite a few of the EU ones too). Our top rate threshold currently cuts in at 1.3 times average earnings; the OECD average is 3.5 times. If you think that is sensible and defensible then defend it – but stop denying it!
You’re a bit hard to please, Peter. I’d say a sentence beginning:
“On the whole, though, I’d agree …”
does not shift the goalposts. Rather it indicates that as regards Britain, I agree that the combined impact of social security and income tax yields a lower maximum marginal rate than for Australia. Given that lower-income earners pay more in tax, that is the same thing as saying the UK system is less progressive than Australia’s.
On the other hand, taking both income tax and social security contributions into account, I don’t believe that Australia has higher maximum rates than most European countries, including Germany.
All other things being equal ie assuming equal efficiency, a progressive tax system is to be preferred to a regressive tax system.
It is clear that Aust. generally has a less onerous, but more progressive, tax system than the rest of the Anglo-American “CER”.
We have one of the lowest overall rates of tax in the OECD. Out of the 30 countries in the OECD, Australia is the fifth most lightly-taxed, with only US and Ireland as comparable countries with lower overall tax-rates (Compulsory private health levies on US companies more than make up the community cost difference).
And we have a somewhat progressive “fiscal” gini-coefficient, although our “financial” g-c is very regressive. Our g-c = 37, relatively high by OECD standards.
Thus our fiscal system should be an object of praise, not condemnation.
Total tax revenue as percentage of GDP 2001
United States 29.6
United Kingdom 37.4
Canada 35.2
New Zealand 34.8
Australia 31.5
Ireland 29.2
Mexico 18.3
Switzerland 34.5
Denmark 49.0
Finland 46.3
France 45.4
Germany1 36.4
Italy 41.8
Luxembourg 42.4
Netherlands 39.9
Norway 44.9
Turkey 35.8
Japan 27.1
Korea 27.5
Austria 45.7
Belgium 45.3
Czech Republic 39.0
Greece 40.8
Hungary 38.6
Iceland 34.8
Poland 34.1
Portugal 34.5
Slovak Republic 33.1
Spain 35.2
Sweden2 53.2
Unweighted
average:
OECD Total 37.4
dear peter,
i do believe prof quiggers may have also “attacked” your claims re germany. perhaps in time you will respond to this “attack”. until then, i will assume that your assertion with respect to the low-taxing prussians has been quietly withdrawn.
he also, i do believe, “attacked” your sloppy use of the phrase “top tax bracket” [an apples-and-oranges type error involving a comparison of years where the top tax brackets are actually rather different]. shall i also assume that this assertion has also been withdrawn?
i await a reply,
yours etc.
John,
I am writing a paper on the problems of the River Murray, and at one stage I would like to compare the cost of the Snowy Mountains Hydro electric Scheme converted to todays A$. The information I have so far is that the scheme cost A$1 billion in 1974 including accrued interest, in real terms what would that A$1 billion be worth today.
regards
Bob “E”
Bob,
You should check the CPI, but I’d guess about $5 billion.
More on tax from Quiggers
I posted a couple of days ago about income tax rates and an intriguing tax cut proposal by the Centre for Independent Studies’ Peter Saunders. As promised in my comment box, John Quiggin has now responded and sought to prove…