Monday message board

It’s time, once again for the Monday Message Board. As usual, civilised discussion and absolutely no coarse language, please[1].

fn1. Given recent problems with trolls and generally heated debate, I’m going to come down harder on this. Please don’t use any abusive language, swear words including *ster*sked versions and so on.

73 thoughts on “Monday message board

  1. Steve,

    Such high tax rates would stop the very well off from putting their capital at risk through investment. While it may not create an investment drought it certainly would not help.

    In pre-Thatcher Britian they had a tax on investment income (they called it “unearned income”) that approached 90%. It should not surprise that in pre-Thatcher Britian there was very little entrenpreneurial activity. Who would risk their capital on a risky venture when any future returns were mostly confiscated.

    ~~~

    It seems to me that we can classify welfare into two groups:-

    1. Welfare that you receive due to your limitations.
    2. Welfare that you receive due to your situation.

    On top of this we means test welfare according to a persons other income sources.

    An example of the first form of welfare might be payments made to a man who has lost his right arm in an accident. An example of the second might be a women who is without a job.

    Notionally the aged pension is due to peoples limitations (type 1 welfare). Although in practice it is these days mostly due to peoples situation (ie they are over 65). Although it’s a situation they can do nothing about.

    Unemployment benefit is clearly a type 2 welfare payment.

    You can remove the means testing of type 1 welfare and still be objective in who gets it. A man with no arm is a man with no arm. However if you remove the means testing of type 2 welfare it becomes pretty unobjective.

    So I propose that all welfare be subject to income tax. If you are otherwise on a low income you will lose next to none of it. If you are otherwise on a high income you will lose half of the welfare payment through income tax. However type 2 welfare would need to be replaced by a general social wage with the objective measure of eligibility being your status as a citizen.

    If the progressive income tax system is supposed to equal us up a little then why not let it do the job across the board.

    Regards,
    Terje.

  2. David Ricardo
    you’re one of the best commenters around, even when you’re putting a skewer into Catallaxy posts. Are you joking or really leaving?

    Perhaps Dave’s moved to some high profile job and will start posting via a pseudonym from now on?

  3. (The removal of disincentives to work).

    Has this claimed impact of a high top rate ever been proved empirically? And why do I hear so much more about it than the disincentives to work at the bottom of the tax scales?

  4. Yobbo:
    “I believe a key point of the 30/30 proposal was that it taxes business income and personal income at the same level, thereby getting rid of any incentive to funnel personal income through companies to achieve lower tax rates. ”
    Understood. What I’m proposing is that everything gets taxed at 35c in the dollar … companies, capital gains, personal income. At the same time abolish negative gearing, depreciation of work-related expenses, depreciation on investment properties, and all the other rorts high income users use to minimise tax.

    Presumably the govt would raise significantly more revenue by taxing companies at 35% and abolishing deductions which would allow for a higher tax free theshold. Yes I know this means raising the corporate rate (gasp!) but 35% is the same as the US corporate rate and is pretty competitive.

  5. “In 1990 bosses took home 18 times as much as their average employee. In 2005 the ratio was 63 to 1. !!!!!!! ”

    So what’s the beef? Is 18x ok but 63x not ok? If so what multiplication represents the margin of ok/not ok?

    For public companies it’s up to shareholders to decide whether they’re getting value for money.

    One drag factor in “right-sizing” executive remuneration is the fact that majority share representation is bound up in superannuation and in insurance company holdings whose representatives on boards of directors are executives whose compensation packages are influenced by the going rate for execs. Thus there is a bit of a conspiracy of compliance. But so long as shareholders reckon they’re getting value for money, this doesn’t loom as a big issue.

    The social and cultural consequences of stratospheric executive emoluments is the creation of “golden ghettoes” where execs tend to lose touch with the market that sustains their companies. Enron was an example of this on the macro scale. And on the comical, micro scale, the pathetic Brian Quinn of Coles/Myer, whose career crashed and burned as a result of the demands of his fearsome wife, serves as a reminder of the perils associated with an excess of money and a severe deficit of dignity and self-discipline. (HIH is another example of this syndrome.)

    The best thing about such “golden ghettoes” is that these vulgarians are forced into each other’s company. Gaol looks to be a better option.

  6. Jason Soon:
    “Has this claimed impact of a high top rate ever been proved empirically?”

    A high top rate may or may not be a disincentive to work, but its certainly an incentive to minimise tax. If the top rate was raised to 80% over $250K I can guarantee you that virtually no-one would pay that rate while the loopholes remain in the tax system. Anyone earning over $250K would find a way to turn themselves into a company (and pay 30%) and/or borrow massive amounts to invest and negative gear.

    “And why do I hear so much more about it than the disincentives to work at the bottom of the tax scales?”
    Because the effective marginal tax rates (EMTRs) for people coming off welfare into work are very high, in some cases >100% I believe. The nice thing about a negative income tax (such as the Reform 30/30 proposal) is that its both progessive (high incomes pay a higher average tax rate) but everyone pays the same marginal rate no matter what thier income level. This means people moving from welfare to work pay 30c tax for every dollar earned.

    I can’t believe the boffins in Treasury can’t come up with a NIT plan that eliminates high EMTRs at the bottom end, reduces rates at the top end while maintaining equity and progressivity. Perhaps they have but there is no political will.

  7. (It was me not jason). A high top rate may or may not be a disincentive to work, but its certainly an incentive to minimise tax.

    I totally agree, but that’s not the question, or the claim made by many against a relatively progressive tax system. I would like to see a far simpler and more transparent tax system with few if any deductions available and one that didn’t skew investment (hello negative gearing). But that’s not the same argument as to what level of progressivity is built into the system.

    Because the effective marginal tax rates (EMTRs) for people coming off welfare into work are very high, in some cases >100% I believe.

    Again we’re in furious agreement, I was making a social point about the relative noisiness and political pull of a small class of top tax rate whingers (3% of taxpayers as of 1 July I believe) versus the great unwashed who are characterised as lazy, uneducable and unempoyable.

    Of course the boffins in Treasury can come up with a decent scheme – but how could special interest groups be bought every election without handouts?

  8. “In 1990 bosses took home 18 times as much as their average employee. In 2005 the ratio was 63 to 1. !!!!!!! �

    The Australian average wage is about $50000 pa. From July the top tax rate will cut in at 2.5 times the average. 2.5 is nowhere near 63 times.

    63 times average wages equates to $3.5 million and I don’t know of many employers who earn that much. In fact I don’t personally know any. 50% of Australians work for a small business (

  9. Sorry wilful it was you.
    I’m not making the claim that a progressive tax system is a disincentive to work. Frankly, I don’t think it is. My point is that if you tax personal income at 48.5%, companies at 30%, and capital gains at half the personal income rate, high income earners are always going to find a way to avoid paying the 48.5% rate. So if most high income earners aren’t paying the top rate, what is the point in having it?
    The personal, corporate and CGT rates should be the same. I don’t really care whether its 30%, 40% or 45% but for Christ’s sake make them the same!
    I was making a social point about the relative noisiness and political pull of a small class of top tax rate whingers (3% of taxpayers as of 1 July I believe) versus the great unwashed who are characterised as lazy, uneducable and unempoyable.

    The Murdoch Press has been running a campaign for “tax reform” (meaning lowering the top rate to 30%) for several years now. That has certainly helped amplify the noisiness of the top tax rate whingers.

  10. Terje, a couple of points on your posts:

    (1) Most welfare payments have been taxable since 1978. The major exception is Disabiliy Support Pension. It’s not taxable because the then treasurer buckled after having to force his way through a picket of people in wheelchairs. I’m told he remembers that to this day and DSP will therefore not be made taxable while he’s PM.

    The reason they’re taxable is to claw them back from people who are on benefits for part of the year but have good earnings the rest; WA crayfishermen are the canonical example. Of course, doing this greatly increases churn – but that just shows churning can be useful in achieving the system’s goals.

    (2) the sort of Basic Income you propose is the ultimate in “middle class welfare” (“MCW”). But that just shows MCW can be useful in achieving the system’s goals.

    (3) NIT/BI type proposals are indeed very attractive in theory. But, having studied them for 20 years, I am absolutely confident that they will never be introduced in any democracy. The winners are those at the very top and those near (but not at) the bottom. Which means the median voters will be the losers – and big losers too.

  11. Derrida,

    You misunderstood my point. This is probably partly due to the fact that I got truncated.

    You are right that welfare payments get “means tested”. And for all intense purposes we may as well call this a tax. My point was that we should remove this “means testing” and let the existing progressive income tax scales do it for us.

    Basically the idea is:-

    1. Abolish means testing.
    2. Tax welfare payments as if it was like any other form of income.

    Of course there are details to be fiddled with.

    With the existing system of “means testing” and “progressive income tax scales” both mixing it together in a compounding manner the actual rate of tax (EMTR) is overly complex and full of perverse and non-obvious scenerios.

    Regards,
    Terje.

  12. Terje: welfare is already taxable income. If you receive nothing except welfare for an entire year, you will be under the tax-free threshold. If you are on the dole for 6 months and earn 20,000 for the other 6 months, you have to pay tax on your entire income for that year, including whatever Centrelink gave you.

    “I can’t believe the boffins in Treasury can’t come up with a NIT plan that eliminates high EMTRs at the bottom end, reduces rates at the top end while maintaining equity and progressivity. Perhaps they have but there is no political will.”

    Why is it necessary to maintain progressivity? Higher income earners still pay more tax than lower income earners even if the tax rate is constant. Why do you insist on the need for higher income earners to pay a larger share?

    As long as the budget is not compromised, shouldn’t the goal be to have people pay as little tax as is necessary, or do you see taxation as some kind of punishment for success?

  13. Yobbo,

    So if you get unemployment benefits for the first six months of the year, ie 26 x $405 = $10530, and then earn $10000 in wages over the next six months your total taxable income for the year will be $20530.

    Your income tax bill for the year will be 0.15 x $20530 – $6000 = $2179.50.

    If we increased the tax free threshold to $21000 per annum and reduced unemployment benefits by $42 per week we would leave the long term unemployed no worse off but the incentives would be tilted further towards working. ie workers would get an increase in take home pay but the unemployed wouldn’t.

    Of course this might create a cash flow problem for the short term unemployed who won’t do a tax return until the end of the year, so you might keep the old rate of unemployment benefits for the first two months of unemployment. ie $405 pw.

    Perhaps it would be politically tolerable, once the unemployment rate is low enough, to put an end to the indexing of unemployment benefits and to compensate by increasing the tax free threshold.

    Regards,
    Terje.

    P.S. Thanks go to Yobbo and Derrida for correcting my understanding of the system.

  14. “So if you get unemployment benefits for the first six months of the year, ie 26 x $405 = $10530, and then earn $10000 in wages over the next six months your total taxable income for the year will be $20530.”

    Correct, except that $405 is the payment for a fortnight of dole, not a week, so you’d actually only get $5265 in half a year of being on the dole.

  15. Yobbo says: “Why is it necessary to maintain progressivity? Higher income earners still pay more tax than lower income earners even if the tax rate is constant. Why do you insist on the need for higher income earners to pay a larger share?

    As long as the budget is not compromised, shouldn’t the goal be to have people pay as little tax as is necessary, or do you see taxation as some kind of punishment for success?”

    I return to my previous point. The wages people receive in a mixed economy like ours do not necessarily reflect the value of an individual’s labour. I personally find it repugnant that drugged up musicians, ill-educated sports stars, businessman with shady ethics and corporate executives earn much more than the actual value of their labour.

    I find it equally loathsome that people who do low status but nevertheless socially necessary jobs like sweeping streets and cleaning toilets earn crap, if you’ll pardon the pun.

    I would like to see the extra taxes raised used to provision social welfare, infrastructure, health, education, environment protection and so on as per the Nordic Model.

    (Did I here Terje groan?)

    I put social equity before private greed, Mr Yobbo. It is an unfashionable social-democratic sentiment but I was born with it and will probably take it to my grave!

  16. Steve,

    Are you saying that you think we don’t spend enough on social welfare?

    For what it’s worth I think your social-democratic sentiment is quite fashionable in Australia and most other places. I would characterise Australia as a social democracy not a liberal democracy.

    Regards,
    Terje.

  17. John,

    Just wondering what your thoughts – as an economist – are on the Iranian Bourse issue – would you consider a blog post on this issue?

    I’ve heard the Iranians are planning (threatening?) to set up a bourse based on Euros rather than US dollars, and that this was a major reason why Saddam was removed. I’ve also heard alarmist talk about how this could triggger a US melt-down and/or global recession.

    There was a lengthy article on this at Information Clearing House by Krassimir Petrov.

    And the latest Market Watch discussion from Paul Farrel is not very reassuring.

  18. “I’ve heard the Iranians are planning (threatening?) to set up a bourse based on Euros rather than US dollars, and that this was a major reason why Saddam was removed”

    oh, that is funny

  19. “I personally find it repugnant that drugged up musicians, ill-educated sports stars, businessman with shady ethics and corporate executives earn much more than the actual value of their labour”

    Is it only Drugged-up musicians you have a problem with? Or do you think Johnny Farnham is as much to blame as say, Keith Richards? What about educated sports stars like Peter Bell? What about businessmen with impeccable ethics? There’s plenty of them around.

    Basically you have nothing to offer except a bunch of outdated stereotypes that you use to justify your own class envy.

    The value of someone’s labour is equal to whatever someone else is willing to pay for it. Marx was wrong, and the rest of the world has known it for 50 years. It’s about time you realised it too.

  20. Yobbo says: “Basically you have nothing to offer except a bunch of outdated stereotypes that you use to justify your own class envy.”

    Your conservative forebears used to lecture the peasants that the feudal hierachy was God ordained and it was immoral and devilish to question this natural order.

    Now conservatives say that those who dare question the natural order of capitalism are guilty of the sin of envy.

    The argument has changed but the substance remains the same.

  21. Why is it necessary to maintain progressivity? Higher income earners still pay more tax than lower income earners even if the tax rate is constant. Why do you insist on the need for higher income earners to pay a larger share?

    As long as the budget is not compromised, shouldn’t the goal be to have people pay as little tax as is necessary, or do you see taxation as some kind of punishment for success?

    I hesitate to use an economics term on this blog, with no claim to any schooling in economics, but there is a useful term that can provide a non-ideological answer to your question, it’s marginal utility. Quite simply, taking 48% of everything over $120,000 means much much less to an individual than taking 30% out of $21,000. The relative ‘hardship’ is well recognised to be much less.

    Extending the argument a little further, there are strong correlations between a society’s geberal happiness/satisfaction levels and it’s degree of equality. The promotion of equality is a public good that is (or should be) one of the central roles of any government, if the only role of government is to promote the welfare/happiness of all of its citizens.

    Australia, would you believe, has had a declining gini coefficient over the past decade.

  22. Oh dear. It seems that poor old Mr Yobbo has decided to cut and run:

    “Whatever dude. Have fun in your Marxist wonderland. ”

    Oh well, I think I’ll go back to reading my Das Kapital 😉

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