Identity crisis (repost from 2014)

When I posted the following piece two years ago, I didn’t suppose it would be enough to kill the absurd idea that “most Australians pay no net tax”. But, given its obvious kinship with Mitt Romney’s disastrous “47 per cent” catchphrase, I felt sure that hardheads on the political right would kill it off before it lined them up on the losing side of a class war.[1] Not for the first time, I was wrong. So, here’s a reprint.

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[2], 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. Romney wasn’t silly enough to push this line in public. He got caught using it at a donors meeting, when someone secretly filmed him.

fn2. 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.

17 thoughts on “Identity crisis (repost from 2014)

  1. Excellent point, but instead of “for the average Australian the same identity must hold”, it would be more correct to say “for the average over all Australians the same identity must hold”. Given the strong skew in incomes to the high end (and consequent skew in income and other taxes), median /= mean, and the median Australian will have less “tax paid” than they receive in “transfer payments and public services”. If we had progressive policies to reduce the skew then this imbalance could be reduced, but I suspect that this is not the remedy that Adam Creighton is arguing for!

  2. I might point out that the value of “defence” is not equal for all Australians. Rich people have a great deal more to lose if we are invaded that do poor people. And I suppose that goes for the police too – they spend a lot of time arresting poorer people to protect rich people than the other way round…

  3. «The point of this post is a really simple»

    It is always the same story: for the working class and the lower middle class the state budget is just a large group purchasing scheme, where they pay in their share of the cost of the stuff that they receive.

    One of the greatest “mysteries” is why so-called “liberals” or “libertarians” object to the state function of being group purchase scheme.

  4. The “large group purchasing scheme” aka the State Budget is not a large co-operative. It is more like a cartel or even a monopoly. The twist being that it is a legal monopoly or legal cartel, because the sovereign state in question says so. But the share in “the stuff” is neither, equal, nor proportionate to tax paid. If the “Panama Papers expose” showed anything like a transparent taxable income situation, then the top one percenters pay no gross income tax. Which means that, after they take their mandated share, the top one percenters pay negative net tax. Now this may also be true of the absolute poor, but getting blood taxes from the stoney money returns of the very poor, is as hard as getting any income (or wealth) tax from the very rich. That is the latent hypocrisy of conservative mantras about so called tax bludgers.

  5. JQ, whereas the principle you have put forward is sound, it does not allow for infrastructure growth. Every generation inherits……..for free…….the accumulated national infrastructure from previous generations minus inherited debt. The neo-liberals, of course, would prefer that all infrastructure was in private hands so that they could profit personally from their use, and to that end we have flogged off our airports, port facilities, energy infrastructure, and they would dearly love to own the roads and all public spaces. Each generation is contributing through taxation to the progressive maintenance and extension of the national infrastructure. This includes roads, schools, hospitals, public buildings, water and sewerage infrastructure, civil security infrastructure(air traffic, fire fighting, defence, police, courts, etc), and most invisible (and perhaps most valuable) of all the body of knowledge growth through tertiary institutions.

  6. @Brett

    No, we don’t have the death penalty. You can always go to jail if you object to paying tax.

    Of course, back in the days of tribes, a failure to contribute would be met with expulsion, and likely death. Humans great strength is their cooperative nature. Its no good dreaming of some mythical place where it doesn’t exist and we are all noble but isolated savages.

  7. Perhaps Brett would be happier in the glibertarian paradise of Somalia.

  8. Neoliberal, libertarianism takes no account of the value of collective action. Major philosophical flaw.

    What value does the Sydney Institute place on the ‘service’ provided by government/society/community that means rule of law/peace/justice/no robbery/no riots/no ransacking my harbourside mansion or I’ll call the cops?

    What value does Mr Creighton or Mr Henderson place on banking and financial regulation that offers the rich a (nearly) risk free way to guard their riches? (i.e. banking, bonds, investment, secure transmission engineering standards for electronic banking…. the securities infrastructure in general. It didn’t happen by accident.)

    Pay your tax rich people! And stop this false whining about ‘no net tax’. Time for a few desk audits of corporates.

    Thanks for the post, Mr Q….

  9. Nathan is correct – just because the average tax paid is the same as the average received (disregarding quibbles over timing, seignorage, etc) does not logically mean that the average person pays as much tax as they receive. It is indeed possible for most Australians to pay no net tax.

    That said, the usual calculation for this that people like the CIS use to get this result only includes personal income tax so it leaves out literally half the tax system – including the most regressive parts (ie the taxes the poor pay). It is, bluntly, grossly untrue. The better calculations the ABS makes in its fiscal incidence studies (5437.0) are only on HOUSEHOLDS, not people, so implicitly includes kids and are also subject to a range of other biases if you try and reduce them to individuals. Plus they still have to leave out a lot on both the tax and spending side. Who benefits from spending on defence? Who pays corporate tax?

  10. @derrida derider

    A more accurate way to make this point is that the “average Australian” doesn’t exist. Most obviously, what gender would s/he be? But to make the point that way is to see that it’s a quibble rather than an argument.

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