Identity Crisis

In the latest issue of Gerard Henderson’s Sydney Institute Quarterly, Adam Creighton, economics correspondent at the Oz, “explains why most Australians pay no net tax”. That’s a striking conclusion, so I checked it out. Creighton has discovered that most Australians get about as much back in transfer payments and public services as they pay in taxation. The poor get a bit more, and the rich a bit less.

To save Creighton some work in future, can I suggest he consider the budget identity constraint “Expenditure = Income”. Since the government spends on services and transfer payments roughly the same amount as it raises in tax revenue[1], it’s obvious that, for the average Australian the same identity must hold, with income renamed as “tax paid” and expenditure as “transfer payments and public services”.

Next up: Why there is no net travel into the CBD

fn1. Taking account of the seignorage from inflation, returns on assets, intertemporal transfers through debt etc, this rough equality becomes an identity. Please, no arguments about deficits, and especially about MMT. The point of this post is a really simple, and doesn’t need this kind of complication.

32 thoughts on “Identity Crisis

  1. @RD
    I don’t think the exclusion of defence really makes a difference here. It just shows his conceptual confusion.

  2. And, of course, the general predilection of the right to privilege armaments over all other kinds of publlcly provided goods and services.

    As the famous Brisbane Line debate showed, there’s no reason to think of defence as a public good at the national level. Perfectly possible to defend some areas and abandon others.

  3. Shock, horror…

    Workers receive no net wage.

    After paying for all their consumption it appears that workers loose as much , if not more, than they receive in wages.

    Geez, I hope the Fair Work boffins take note.

  4. Great post! Enjoyed! Silly Adam but this nonsense suits (and is presumably driven by) his ideological priors.

  5. @Uncle Milton #17

    It’s misleading of Creighton to conclude that most households pay no net tax, as most will believe he is using the common national accounting measure of NTT, Net Taxes and Transfers, meant to show financial transfers to and from government. He’s totally changed it to include his own invented monetised aggregate “social security in kind – “free” schools, hospitals, public transport, etc”.

    When George Megalogenis did some analysis of NTT a few years ago (“The Tax Free Middle Class” the Australian, Sept 20, 2008), he said 42.2% of households were net financial beneficiaries, up from 38% in 1996, and trending to 50% in 2020. Creighton doesn’t try to analyse or update this – maybe he won’t get the “most households” conclusion?

    Another bit of silliness is the claim that people don’t know they’re paying GST because total price must be quoted. Information transparency was the policy goal here, and no sign after 13 year that people don’t have a good grasp of this, with GST usually itemised on bills. Is he a rational economist or not? Does he ever look at his bills?

    He should be severely punished for his mischief-making. I suggest a beer with Gerard is for a first offence, and two beers with Gerard if he does it again.

  6. @Peter Whiteford #25

    Plenty of meat in this analysis. Just to cherry pick a data comparison which stood out for me, the highest household quintile received 45 per cent of private income and paid 46.5 per cent of all taxes paid (direct and indirect); they might complain about not getting enough back, but the claim they are over-taxed looks weak.

    Peter’s 10 Feb 2014 article at Inside Story “Is Australia’s welfare system unsustainable?” is also content-rich and germane to this debate.

  7. Once upon a time, when I was at school, we envisaged a future where our biggest problem would be finding something to do with all our spare time. Automation would mean that there wasn’t much work.

    But now, even though we do everything a lot more efficiently, and some of us still work very hard, we apparently can’t afford a welfare system for those whose labour we don’t need.

    No doubt this makes sense to someone. But not me.

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