Rethinking tax policy for Australia

The title of this post is taken from that of the recent Treasury Discussions Paper on Tax, entitled Re:Think. Sadly, as I point out in this Guardian piece, there’s very little evidence of rethinking from Treasury. Most of the paper could have been lifted straight from the Asprey Review of 1975, and the sensitivities of the current government have ensured a step backwards from the Henry Review, with carbon taxes and resource rent taxes now off limits.

Undeterred, I’m going to start on my own review. I’m going to try something a little different in blog terms. This post will be updated whenever I get a chance, both with new material and in terms of publication date so that each new version will appear at the top of the homepage, hopefully with the comments being carried with it. I’m putting in some headings, and starting off with an idea I mentioned recently, that of a tax on bank profits

Aggregates: Revenue, expenditure, budget balance, debt and net worth

Revenue options

* A tax on the super-profits of banks, reflecting their privileged position. Tax base $29 billion. Possible revenue $5-10 billion, or 0.3-0.6 per cent of national income/GDP.

* Reforming the treatment of negative gearing “Quarantine” business losses for individuals, at least with respect to housing investments, and allow them only to be used as an offset against capital gains. Revenue estimate: rising over time to $5 billion a year, or 0.3 per cent of national income/GDP.

Expenditure requirements

96 thoughts on “Rethinking tax policy for Australia

  1. John Brookes :
    I don’t think that high income tax rates are a disincentive to high income earners working

    If you go back to the Greed is Good decade of the 1980’s, before that the remuneration of the executive class wasn’t orders of magnitude greater than average. It was also a time when the top rate of personal income tax was higher, so maybe before the 1980’s the executive class wasn’t incentivised (love that word !) to work hard, and then when tax rates fell, they unleashed this explosion of effort and productivity to justify their salaries.

    Maybe we can be like the USA and reduce taxes on the rich even more, and this will unleash an even greater bout of productivity and we’ll see salaries demanded in the $100’s instead of $10’s of millions. Just think how productive our economy will become – oh, wait hasn’t quite worked that way in the USA.

  2. This suggests that with higher taxes people will work harder.

    I’ve heard it is the same when you whip people.

  3. @TerjeP

    I found being treated like sh** by bosses to be a much higher disincentive to work than taxes. If my taxes had been been a bit higher and had been used to keep capitalist bosses (and mangerialist bosses) in line I would have been much happier and more productive at work. I can say that because I was much happier and more productive at work in my first 20 years in the workforce than in my last 20 years.

    In the last 20 years, neoliberalism and manegerialism took over and ruined most workplaces private and public, tilting the playing field heavily in favour of capital and heavily against workers. Now almost all workers are treated like sh**. This is what happens in unfettered capitalism. All the wealth goes to a few and the majority, the workers, lose ground. Current trends in this regard are not sustainable. If current trends continued in the long run we would reach the point where workers get zero pay and capitalists get everything. Clearly that system won’t work so where does the process of continually cutting workers’ pay end and what ends it? That is the key question now. Greece is on the front line of this question.

    Footnote: Even slaves can’t be worked for zero pay. They must get “pay” in kind; namely basic food and cheap lodgings or else they die. Also they won’t breed abd replace. Slavery is apposite in this context. Capitalists want to reduce workers back to slavery. Just look at the Apple factory in China (one example).

  4. @Ikonoclast

    I looked there. The trouble is that the information is presented to identify people who do have to lodge tax returns, and is not conveniently structured to identify people who do not have to.

    But then I searched the ATO website for information about the tax-free threshold and found this:

    If you have earned less than the tax-free threshold during the financial year, what do you need to do?
    You need to work out if you must lodge a tax return.
    You must lodge a tax return if:
    your payment summary shows you have had tax withheld
    you have paid tax under the PAYG instalment system.

    People whose only source of income for the year was the Newstart Allowance will have incomes well below the tax-free threshold (they’d still be under even if they did manage to earn a few dollars in interest on a bank account), they won’t have payment summaries showing tax withheld, and they won’t have paid PAYG instalments, so they, or at any rate most of them, won’t have to lodge tax returns.

  5. I found being treated like sh** by bosses to be a much higher disincentive to work than taxes.

    Bad bosses are a problem. No argument. But I don’t think they are related to the tax system or economics reforms. Except that bad bosses don’t deal well with stress or change so any period of stress or change will probably make the bad bosses more visible.

  6. @TerjeP
    But what bad boss means? Is it bad boss for boss’s boss or bad boss for workers?

    Most often bad boss for workers means good management for top bosses, very rarely this descriptions works both for workers and top management.
    Why?, Because incentives to be bad to workers are working for top management benefits.

    If you want to find a proff of it is the fraud in banking that destroyed banks and shareholders but public money saved them.

  7. Just on the tax question, this is my understanding, which hopefully may clarify some of it.

    1. If you paid income tax in the financial year you have to lodge a tax return.

    2. You may have paid tax even if your annual income was below the tax free threshold, if you worked at a higher rate of pay for a short term, because PAYE tax is deducted on the rate during the pay period, not the year.

  8. @Val

    But if you were unemployed all year and your only income was the Newstart Allowance, then you won’t have paid any income tax instalments, right? and so you won’t have to lodge a tax return, right?

  9. But if you were unemployed all year and your only income was the Newstart Allowance, then you won’t have paid any income tax instalments, right?

    Not necessarily.
    You can request Centrelink withhold some of your income for tax (usually in the optimistic belief that you won’t be on Newstart for the whole financial year).
    Now, let’s get on to the pressing question of how many angels can dance on the head of a pin.

  10. @zoot

    It’s not that simple.

    How do you define “dance”? For example, standing very still might just be a very slow waltz. Or it might be a modern interpretive dance.

    How big are the angels? If they are very big and the pin is very little, that would make a difference to the calculations.

    If it is a barn-dance you would need a barn the size of, or smaller than, a pin head. Could you get DA for such a small structure?

    If the angel dancers only did one paid dancing gig for the tax-year and earned only one dollar would they have to file angel tax returns? Does H & R Block even do angel tax returns?

    So many questions and so few answers.

  11. However their top income bracket, which apparently starts at £150,000, is much higher than ours, which starts at $180,000. £150,000 at current exchange rates is closer to $290,000.

    We could introduce a higher bracket, say starting at $250,000. That would include most of the top 1% of high income earners. In fact if you wanted to be politically smart, you could raise most income brackets slightly (compensating for bracket creep) while introducing a new 50% income tax bracket starting at $250,000 for the “super-rich” (http://www.smh.com.au/federal-politics/political-news/if-you-want-to-be-uberrich-you-will-need-to-earn-668700-20130505-2j1eq.html – this is a bit old but I couldn’t find anything more recent on a quick google search).

    However the UK report authors caution that it might not be a great revenue raiser (I think because high income earners might shift their income round, I presume through family trusts and similar) – they mainly recommend it because it would reduce income inequality.

  12. Would applying a Tobin Tax (or similar charge) contradict the Articles of the proposed TPP Agreement which uses the words “all transfers relating to a covered investment to be made freely”?

    See latest version (march 2015):

    Article II.8: Transfers [19]
    1.
    Each Party shall permit all transfers relating to a covered investment to be made freely
    and without delay into and out of its territory. Such transfers include:

    (a) contributions to capital;

    (b) profits, dividends, interest, capital gains, royalty payments, management fees,
    and technical assistance and other fees;

    (c) proceeds from the sale of all or any part of the covered investment or from the
    partial or complete liquidation of the covered investment;

    (d) payments made under a contract, including a loan agreement;

    Source: https://wikileaks.org/tpp-investment/

  13. introducing a new 50% income tax bracket starting at $250,000 for the “super-rich”

    $250k is a high income but is that really the definition of “super rich”?

  14. All profits taken offshore should be taxed at the full Australian company tax rate irrespective of whether taxes are also paid on these profits in another country.

  15. The effectiveness of a tax system depends on the answers to these questions:

    How well does it function as a macroeconomic tool for influencing aggregate demand?

    How well does it promote allocative efficiency in the economy?

    How well does it achieve redistributive goals?

    To what degree does it prevent rent-seeking?

    Revenue is not a relevant consideration at the national level. State and local governments are revenue-constrained but the national government is not. If there is room in the economy for non-inflationary government spending then the government can spend without destabilising prices. It doesn’t get its money from taxpayers and bondholders. Taxpayers only get their hands on the dollars they need to pay their taxes and bondholders only get the money they need to buy bonds because the national government created created those dollars and spent them in the private sector through a process of crediting bank accounts.

  16. @Geoff Edwards

    Be careful mate, you are introducing empirical reality into an economics discussion. 😉

    There is nothing so far from empirical reality as standard magic pudding economics where they believe;

    (1) The economy is freestanding with no relation to material and energy limits.
    (2) Infinite growth is possible.

    Oh, I know they SAY they don’t believe these things. Then they go right back to advocating policies based on those precise premises. It is hopeless trying to get them to understand that the economy is a sub-system of the biosphere system. I don’t know why they can’t understand that. Probably because standard economics is eseentially a dogmatic system like a religion.

  17. @Ikonoclast

    This is completely wrong, but I’ve pointed the fact out too many times to be bothered doing it again.

    Readers tempted to pay attention to Ikonoclast might want to consider, why most standard definitions of economics represent some variant on “the study of the allocation of scarce resources”.

  18. John
    Go for it. The current thinking is tired or timorous (or both). One area that, on the evidence, warrants serious attention are Pigouvian taxes, notably to address excessive alcohol assumption. This approach, coupled with a strong educational/regulatory approach, has been successful with tobacco. Latest estimates I have seen suggest social costs in Australia of excessive alcohol consumption (health, family breakdown/violence, lost productivity) in the range $15-20bn, compared with the current tax yield of <$10bn. See AIC paper here
    http://www.aic.gov.au/media_library/publications/tandi_pdf/tandi454.pdf)
    Of course, action in this area would be wildy popular with the AHA and brewers and hence presumably very attractive to a government that has so wedded to the highly selective use of market signals and driven by moral panic rather than evidence (cf the Ice Taskforce).

  19. @John Quiggin

    The “allocation of scarce resources” is a common definition of economics.

    Reality is constructed by political economy.

    Monopolists use politics to create, maintain and profit from an artificial scarcity that would not exist if there was only a simple “allocation of scarce resources”.

    However the issue seems to me to be more the belief of capitalist Keynesians that future growth is endless and therefore, it is implied that there is no scarcity in the long run.

    You have pointed to a claim and an opinion, you have not pointed to a “fact”.

  20. But..but… Joe Hockey says he is “philosophically opposed” to raising taxes, which I read as code for “can’t tax the well-off, because who else can afford to pay?”. So, in JH’s book the only option is to cut expenditure – which is the main idea all along, as long as the cuts are on health, education and welfare. Obviously, you people here aren’t getting with the program, because you insist on discussing tax-reform without realising that “tax reform” means “tax cuts”. Please continue your useful exercise. I just hope the ideas here may be of use to someone else someday.

  21. @Ivor

    There is no ‘belief of capitalist Keynesians that future growth is endless and therefore, it is implied that there is no scarcity in the long run’.

  22. http://www.scientificamerican.com/article/does-economics-violate-th/

    “”Real economics is the study of how people transform nature to meet their needs,” said Charles Hall, professor of systems ecology at SUNY-ESF and organizer of both gatherings in Syracuse. “Neoclassical economics is inconsistent with the laws of thermodynamics.”

    Like Hall, many biophysical economic thinkers are trained in ecology and evolutionary biology, fields that do well at breaking down the natural world into a few fundamental laws and rules, just like physicists do. Though not all proponents of the new energy-centric academic study have been formally trained in economics, scholars coming in from other fields, especially ecology, say their skills allow them to see the global economy in a way that mainstream economists ignore.”

    Basically, the scientists (physicists, ecologists etc.) understand the empirical reality of our world (as well as humans have managed to do so to date and far better than any religious or idological system like standard economics). Standard economists don’t understand empirical reality at all. Standard economics is a formal system divorced from the empirical realities of real systems.

  23. On taxes, why not tax the things easiest to tax? Tax consumption, real property, capital and wealth. I know a consumption tax is regressive but everything thing produced must be consumed (or else wasted). Therefore tax consumption and do it progressively as in;

    (a) whole, unprocessed foods and staples 0%.
    (b) processed foods 10%
    (c) standard goods and services 10%
    (d) junk foods and luxuries (sliding scale of 20% to 50% depending on category)

    With property, wealth and capital put high taxes on non-productive and speculative activity / wealth. Rapidly scale up the taxes on welath. For example, the property tax on a second house should be more than the tax on the first house, the tax on the third house more again and so on. Same with the second million, third million and so on.

  24. J-D :
    @Ivor
    There is no ‘belief of capitalist Keynesians that future growth is endless and therefore, it is implied that there is no scarcity in the long run’.

    Weird ????

    If this is so, what is the end of future growth that Keynesians supposedly believe in?

  25. @J-D

    Your comprehension skills are inadequate.

    The question was:

    what is the end of future growth that Keynesians supposedly believe in?

  26. @Ivor

    Your question was ‘What is the end of future growth that Keynesians supposedly believe in?’

    My question is ‘What is the end of future growth that you believe in?’

  27. @J-D

    So you cannot answer the question?

    Therefore your original “weird” statement must be wrong.

    So why did you say:

    There is no ‘belief of capitalist Keynesians that future growth is endless and therefore, it is implied that there is no scarcity in the long run’.

    And why are you asking what I believe in – when this is not relevant.

    My statement was about capitalist Keynesians, and I am not a capitalist Keynesian. But you seem to want to tell us what capitalist Keynesian beliefs are.

    Do you have the necessary skill for this?

    Maybe you do not know whether Keyenisan capitalists do or do not believe that future growth is endless.

  28. @Ivor

    I am asking you the question ‘What is the end of future growth that you believe in?’ because it is relevant, as I will demonstrate once you answer it.

    I _can_ answer your question, but it will be much easier if you answer mine first.

  29. @J-D

    This makes no sense.

    If it was relevant to ask someone a question – you would have done it before initiating a dispute.

    What others believe is different to what Keynesians believe.

    My view was that capitalist Keynesians believe that future growth is endless. You chose to deny this. This denialism is such a weird claim that it is surely wrong.

    You are not making any sense.

    Maybe you now realise what you said was either vexatious or just false?

  30. @Ivor

    In answer to your most recent question: no, I stand by what I wrote.

    I observe that you’re not answering my question.

    Also, the second and sixth statements in your most recent comment are false.

  31. The charity-based Tax Justice Network estimates at least $32 trillion sits in tax havens/secrecy jurisdictions.

    Click to access Price_of_Offshore_Revisited_120722.pdf

    Any idea of how much of that is owed to Australia?

    Could we say that the Gross World Product is $75,592 billion:

    https://en.wikipedia.org/wiki/Gross_world_product

    And Australia’s GDP (nominal) is $1,400 billion (IMF figure):

    https://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29

    Therefore Australia’s cut of the $32 trillion in tax havens is 1.4/75.592 = 0.019% of $32,000 billion, or …

    $608 billion?

    Of course, actually getting that money is harder than calculating it!

  32. @J-D

    So you assert that there is no belief by Keynesians that future growth is endless.

    So what is the Keynesian Limit to Growth?

    Is not deficit spending based on the expectation of future growth?

    Is this a Keynesian principle?

    Why do we have global debt of 200 trillion? Does this suggest that the Keynesians who took over western economic management after the Depression, expected future growth to cover it?

    Will this debt increase?

  33. From last weeks Sunday Ockham’s Razor radio ABC program.

    ‘Sustainable growth’ is a con that has been used to justify continuing unsustainable business-as-usual.

    Of course, some will deny everything said so far. Humanity could arguably be called Homo denialensis not Homo sapiens, for we are very good at denial. Denial is common and has a long history (DDT, smoking, acid rain, CFCs, climate change etc.). As Naomi Oreskes of Harvard uni illustrates in Merchants of Doubt, denial often comes from an ideological basis. For example, the denying of climate science as it may lead to further regulation of ‘the market’ deemed sacred by neoliberals. Denial is also not just due to the denial industry, for ‘implicatory denial’ is rife in ‘we the people’. We are sadly very good at fooling ourselves and ignoring the implications of what we (en masse) do. However, the denial dam can be broken, and this is a requirement for sustainability.

    ABC Radio

    Soon, I hope, Keynesians will admit that there are limits to growth and the economy must be restructured accordingly.

    Soon, I hope, capitalists will admit that there are limits to growth and the economy must be restructured accordingly.

    Soon, I hope, academic economists will admit that there are limits to growth and the economy must be restructured accordingly.

    Soon, I hope, politicians will admit that there are limits to growth and the economy must be restructured accordingly.

  34. Keynesianism is nothing more and nothing less than a school of macroeconomic thought.

    Keynesianism will not put the kettle on for you.

    Keynesianism has no opinion on whether in this day and age it is OK to wear white shoes after Labor Day.

    And Keynesianism sensibly walks in the opposite direction when it sees a scared weird little dude with an LtG idee fix holding a “The End Is Nigh” sign.

    I hope that clarifies matters.

  35. I use Drobbox (a very useful product), and was amused to get the following email from them. It seems to me that the government might want to act on income going to tax havens rather urgently.

    Hi there,

    If you’re a user living outside of North America (U.S., Canada, Mexico), we’re updating our Terms of Service to better serve you and the growing number of Dropbox users around the world. These changes include the fact that we’ll be providing our services (including Dropbox, Dropbox for Business, Carousel, and Mailbox) to you via Dropbox Ireland starting on June 1, 2015. Please note that none of our services or features are changing as a result of this. You can read the updated terms at https://www.dropbox.com/terms.

    Have questions about these changes? Visit our Help Center.

    Thanks for using Dropbox!
    The Dropbox Team

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