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. @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.

  2. @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?

  3. 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.

  4. 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.

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