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

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.

79 thoughts on “Proof by exhaustion that we need a higher top rate of income tax

  1. 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.

  2. 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.

  3. @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.

  4. 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.

  5. @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.

  6. 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?

  7. @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.

  8. @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.

  9. @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.

  10. 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.

  11. 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?

  12. 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.

  13. 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

  14. 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.

  15. 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.

  16. 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.

  17. @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.

  18. 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.

  19. 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.

  20. 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.

  21. @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.

  22. @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?

  23. 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.

    This is what we are competing against costwise.

  24. 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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