I’ve never been a fan of Senator David Leyonjhelm, but even so, I find it hard to believe he made the mindbogglingly absurd statement attributed to him by today’s Oz. Accusing Bill Shorten of a $1.85 billion black hole in relation to his policy of keeping the levy on high-income earners,

But Liberal Democratic senator David Leyonhjelm yesterday called out the Labor costings as disingenuous. He said it was “misleading budgeting” because Labor had no way of extending the deficit levy from opposition.

Say what? On this basis, no Opposition should ever announce policy of any kind. And of course, that goes many times over for members of fringe parties that have no chance of ever forming a government. I’ll be interested to see if he claims to have been misquoted.

Regardless, Leyonjhelm is one of a stream of regrettable politicians to be drawn from the ranks of the Institute of Public Affairs (IIRC, some even worse possibilities were derailed by racist indiscretions on social media). I won’t name names, instead repeating my possibly unhelpful endorsement of Chris Berg as the only person associated with the IPA for whom I have any intellectual respect.

39 thoughts on “Mindboggled

  1. His premise is wrong in any case. Whether the levy gets extended is up to the Senate. Support by Labor is necessary for an extension.

  2. Now I’m curious. Exactly who are the other IPA alumni(?) that actually ran for office? My idea of the IPA’s influence was that it is mostly wielded through op-eds in The Australian.

  3. Retaining the levy along with the increased Medicare payment raises the marginal tax rate on those earning $180,000 per year to almost 50%. I guess this is part of the attack on the “millionaires” that Shorten keeps ranting about. I think “soak the rich” is about the extent of his policy imagination.

  4. What’s the best collective noun to describe the IPA? I think it would be the same one used to describe a collection of stopped clocks, whatever that is.

  5. @John Quiggin

    That these marginal tax rates are high at only moderately high incomes and likely to have large substitution effects as well as impiinging unduely on individual economic liberties. That the only response to deficit problems should not be to tax middle and high income earners more.

  6. @hc

    Without getting into your subjective claims about impingement on ‘individual economic liberties’ or whether there is indeed a ‘deficit problem’ at the moment, saying that Shorten’s only response is ‘to tax middle and high income earners more’ seems to take a substantial intellectual liberty.

    They did identify savings in the budget — abolition of the baby bonus and the direct action subsidies programs for example — as a way of trimming the deficit.

    I’m no supporter of Shorten, but one should be honest.

  7. Senator Leytonjhelm does not even read political history. In the early part of the Twenty-First century (only some 15 years ago) Theresa May, when in opposition, told the Conservative Party annual conference that if a party wanted to win government at the next election, it had to submit actual policy decisions and present itself as an alternative government. Guess where that advice got the British Conservative party some years later? As for a marginal tax rate of “almost 50 percent” ever be seen as “soaking the rich”: the whole proposition is absurd. Rich people rarely pay at their marginal tax rate anyway. Warren Buffet once said that his effective tax rate was lower than that of his secretary. How was this possible within the law? Simply by setting up family trusts and having your companies, that you either own or hold shares in, set up their head offices in some tax haven. Don’t “cry a river of tears” for the “oppressed millionaires”‘ because they simply don’t exist. Rich people can afford to protect their income from taxation. It is the poor and lower middle class that have to pay too much tax because these bludger rich people think they are a special case. That is the real sickening reality of the Australian Income Tax Assessment Act, 1968. Getting the rich to pay their fair share of tax is the hard bit, e.g., the banks, despite what Dr. Henry may say now that he works for them.

  8. @hc

    With the levy, the highest marginal tax rate is 49.5%.

    Without the levy, the highest marginal tax rate is 47.5%.

    Are you saying that the extra 2% makes a lot of difference to “large substitution effects as well as impiinging unduely on individual economic liberties.”

  9. @hc

    “these marginal tax rates are high at only moderately high incomes”

    The top rate kicks in at a taxable income of $180,000.

    According to the ATO data, 3% of people have a taxable income at or above $180,000. On average, their taxable income is $342,000.

    The top half of this top group (those earning over $250,000) have an average taxable income over $510,000.

    Are these “only moderately high incomes”? If your social circle consists of hedge fund managers, I suppose they are. But on the whole most people would think these incomes are high, not moderately high.

  10. @ Greg McKenzie

    And Turnbull managed to keep a straight face while criticising Sally McManus:

    Mr Turnbull said Ms McManus represented a “culture of thuggery and lawlessness which the CFMEU, of course, is a great example of”.

    “She believes that unions only have to obey the law if they agree with it,’’ he said.

    “On that basis if people thought taxes were too high they wouldn’t have to pay their tax……”

  11. hc, I second Smith’s comment. I’d be delighted to have a marginal tax rate of 49.5 per cent if the prerequisite was that I had income of $180,000.

  12. I know Smith and John Smith. Envy will take lefties a long way in political discussions. Justifies any tyrannical seizure of other people’s income and wealth. You earn a $1 and let me (charitably) take 50 cents and spend it for you.

    A certain level of involuntary seizure makes sense given the existence of public goods and redistribution objectives but it is never anything less than a form of coerced extraction that only the left feels virtuous in enforcing. Worth not getting too holy about doing such things. Let people make money through their efforts. Live and let live. $180,000 annually is not a lot – even university professors earn this.

  13. @Greg McKenzie
    “Senator Leytonjhelm” is that just a typo or should we read more into it? I would be happy to do so, if only I knew what to make of it. But you are quite right that he does not acknowledge history, or any other facts for that matter. Why would he do that if they do not suit his agenda?

  14. Who gets paid $180,000 per year, Harry Clarke (hc)? Is it the research scientist or the GP or anyone else who does something truly useful? Nope, it is usually the brainless sports star, the worthless if not dangerous finance guru and the sociopath or well connected schmoozer who polishes a chair with his butt in some city office. I’d tax them at 60% and then at 75% for incomes over $500,000.

  15. According to a paper from ACOSS 2015 [link below]
    “The combined effect of income and consumption taxes – including income tax, GST
    and other indirect taxes when added together is not as progressive as often believed.

    In fact, the picture is much more nuanced, with a rate similar to that of a flat rate tax on
    incomes of around 25% (+ or up to 4 %) on all income groups

     The progressive effect of the personal income tax is substantially offset by the
    GST and other indirect taxes, so that:

     The bottom 20% pays an average of $129pw or 24% of their income

    The top 20% pays an average of $1,006pw or 28% of their income

     The second 20% pays 21% of their income.

     The greater the role for personal income taxes in the overall tax mix, the
    greater the reduction in household income inequality from the tax system as a

    Click to access Tax_Talks_1_Are_we_paying_our_Fair_Share_2015_FINAL.pdf

  16. Leyonjhelm, like other libertarians, deals in cliches and slogans, not reality; was there any reason to expect well informed and well reasoned utterages from him?

  17. Since you’re an economist, hc, I assume you’re aware that large numbers of households face an effective marginal tax rate well above 50 per cent. That includes lots who will pay the higher levy under Morrison’s proposal. So, why the concern about the top 3 per cent.

  18. Not sure whether you are talking about interactions with other taxes or what. My concern is with (1) the “soaking the rich” ethic which seems to dominate most leftwing discussions of budgetary problem and (2) the relatively low income level at which maximum MRTs cut in. Currently the well-off (include university professors and doctors) pay the vast bulk of income taxes in Australia. Adding a couple more points to the tax schedule for them is an inviting prospect for governments who face political obstacles to cutting spending.

    But such moves cut into work effort and entrepreneurship – those unseemly aspects of capitalism that benefit us all. They also seem to raise ethical issues that I think are not only of concerns to extreme libertarians.

    I took some time here to respond because my comment was put ‘in moderation’. Whatever my reactionary politics I have been a consistent commentor on your blog for more than a decade. I thought I had not particularly annoyed you of late. Did I? Or has the heavy rain dampened the spirits of those in our far north?

  19. Let’s carry on HC’s argument.
    Take an income tax with five progressive bands after a tax free threshold. The tax free threshold ends at 50% of median full time wages; the first band at 90% of median full time wages; the next band at 120%; the next band at 150%; the next band at 180%; and the fifth band takes over from there.
    Now, we keep all rates the same – but we abolish the top band. Oooh! Maximum MRTs now cut in earlier! Soak the rich!
    Do it again. Now maximum MRTs cut in still earlier. Do it again.
    Go to a single flat tax rate. Maximum MTRs now cut in at zero (or, if you keep a tax free threshold, at the end of that threshold).
    The point is obvious. Low onset of a low MTR is not soaking the rich – it’s dismantling progressive taxation for the benefit of the rich, and doing so is likely to make maximum MTR cut in ever lower with each round of change, as has happened for years in Australia.
    Such changes do not cut into work effort and entrepreneurship. They reward high income earners more and allow them to work less for the same return – as, around the ACT region, medical practitioners do (meaning there are more practitioners per head of population, but less availability of medical practitioners than other areas, because bulk billing is far lower there than anywhere else in Australia).
    Now, HC, how about an answer for the low-income people whose effective marginal tax rates are substantially higher than anything you express concern about? JQ brought it up: you seem to be unwilling to say more than ‘look, there’s an echidna!’.

  20. @hc

    Why is 49.5% “tyrannical” but 47.5% so conducive to entrepreneurship? It doesn’t make any sense. And of course since the 2013 budget the top rate has been 49%. Who knew that Abbott-Hockey-Turnbull-Morrison were lefties were out to soak the rich? Over this four year period, have we seen entrepreneurs flee the country? Have we seen a big fall in work effort because it’s just not worthwhile to earn another dollar (once you have earned 180000 of them) and pay 49c in tax, whereas when you only paid 47c of tax all the right incentives were in place?

    If we were talking about a difference of 20% in marginal tax rates your argument might at least be plausible. But 2%? Doesn’t pass the pub test. I’ll bet it doesn’t pass any statistical test either.

  21. ChrisH, I assume you are interpreting John to be talking about the interaction of tax and social security benefits which does create very high MRTs among low income earners. I agree. This was the basis for Mirrlees argument for having relatively low MRTs on high income earners but high average rates and hence for a relatively flat tax schedule. High income earners are not deterred from working by high marginal taxes and hence can transfer a lot of income to low income earners. Low income earners may have disincentives to work but you don’t lose much anyway as their productivity is low and their incomes can be boosted by transfers from those more wealthy.

    My only quibble with this argument is that work itself may have intrinsic values and that maintaining a pool of unemployed that are funded by transfers from the hard working rich may sacrifice these intrinsic values. But I do accept Mirrlees’ basic point that you do have to take particular care with levying high MRTs on those on higher incomes.

    Smith, You are paroding my argument which is concerned with setting high MRTs on modest incomes as a way of dealing with deficits. Temporary surcharges whose abolition, when the time comes, becomes a “handout to the rich” is a stealth-like move but it is clear what is happening.

  22. @hc

    hc, it was you who used the word tyrannical and it was you who said the proposed 49.5% MRT would deter work effort and entrepreneurship. If you think this is parody, the parody is all yours.

    If you think $180k is a modest income, you need to get out more. 97% of people make less than this. 97%! Australia is a rich country but you say at least 97% of people make at best a modest income.

  23. The “hard working rich”, now that’s a laugh as a rhetorical device. Let’s go through it.

    (1) There are some hard working rich but how much wealth can one person’s hard work justify? Certainly not billions of dollars to one person.

    (2) There are also the idle rich: rich by inheritance, luck and simple possession of shares, property etc. They have managers and brokers to look after all this for them.

    (3) Then there are the hard-working poor. It might surprise hc to realize many people work hard and remain poor. There are many, many more hard-working poor and hard-working middle income earners than there are hard working rich: by a huge absolute margin and also by a considerable percentage margin.

    This myth that only the rich are hard working is just that; a most self-justifying and pernicious myth. It’s promoted to justify the vast disparities in wealth between a few rich and the many, many hard workers in the middle and lower percentiles.

  24. The “rich” here include doctors and university professors. Most that I know are hard-working.

  25. @hc

    “The “rich” here include doctors and university professors. Most that I know are hard-working.”

    As anyone can check if they feel like it, I’m in this category. I would certainly claim to be hardworking and good at what I do, but I wouldn’t remotely describe my income as modest.

    Like most non-billionaires, I tend to balk at “rich”, which tends to be used mainly for people like Rich Lister* (always in the news for doing something wrong), but by just about any historical standard I’d have to say I am rich.

    And of course, precisely because I’m hardworking and good at my job, the suggestion that I’m going to slack off because my marginal tax rate goes up 2 percentage points makes no sense to me. The evidence I’ve seen suggests that the incentive effects might start to bite at a marginal tax rate about 70 per cent. To be on the safe side, I’d suggest a top marginal rate of 60 per cent. That’s similar to what prevailed a few decades ago, and to the EMTR of many families.

    * In case it’s not obvious, this is a joke.

  26. HC argues that top MTRs have to cut in only at high incomes. HC speaks approvingly of Mirrlees’ view (as he represents it) that tax rates should be relatively flat.

    Top MTRs are on lower and lower incomes as high rates are removed and the system flattens.

    If what matters are the actual levels of MTRs, our highest income tax rates are now too low and no contemplated tweaks will make material difference to MTRs that come only from them. There’s no plausible argument or evidence that keeping the 2% surcharge would have, or that introducing it for the last three years had, any worrying effect on behaviour.

    JQ suggests, conservatively, that marginal rates above 70% may begin to be problematic; only lower income earners have faced effective marginal rates at that sort of level any time these last thirty years, in Australia. (And those most argumentatively concerned about inducements seem happy to treat fixing those high effective rates as too hard.)

    The strange notion that combining flat(ter) tax rates with strong targeting of support to the poor would be good, because somehow high effective rates matter only to high income earners but are trivial to low income earners, would need strong evidence. It has no supporting evidence, strong or otherwise.

  27. @hc


    Mirrlees’ analysis has been advanced by Emmanuel Saez and Peter Diamond, who conclude that a top rate of 73% is optimal. The papers are all available online for your reading pleasure.

  28. ChrisH, Your first sentence does not make sense and I did not say that. I said one should be wary of high MRTs on higher incomes because work disincentive effects matter more there. If a person earning $1m annually cuts their work effort by 10% then social output drops by $100,000. If a person earning $20,000 annually cuts their effort by 10% then output drops by $2000. If incomes are to be transferred from rich to poor then disincentive effects on high-income earners matter a lot.

    ChrisH, I’ve read the Saez and Diamond attempt to empirically implement the Mirrlees’ arguments. There are now many such studies about the place e.g. in the Mirrlees Taxation Review. They are very, very rough in terms of offering specific insights. I prefer the original Mirrlees’ paper, because, despite its high generality, I understand the logic of his conclusions. It is exposited in my response to ChrisH.

  29. When you said that you had two concerns, and the second was ‘the relatively low income level at which maximum MRTs cut in’ (above, at #22), you were clarifying your remarks at #8 that ‘these marginal tax rates are high at only moderately high incomes’.

    I understood you to be expressly arguing that MTRs need to cut in at higher income levels. I still understand your remarks as carrying that meaning. Perhaps that meaning does not make sense: but you certainly did convey it.

    I discussed the obvious error of such a view. But I am among many who have pointed out that the actual marginal rate of tax applying to what are certainly high incomes is not high enough to suggest any meaningful disincentive effects.

    Now you suggest that disincentives on high income earners are more important because a percentage reduction in income is much more for a high income than the same reduction for a low income. But disincentive effects have to be married with the numbers in the population. There are many more low income people facing much higher effective marginal rates than the 47% or 49% which concerns you for those earning above $180,000.

    If disincentive effects follow even in a linear way from effective marginal tax rate, the loss of income to the low income people collectively is likely to much exceed the loss of income to the high income earners collectively. And most analysis of disincentive effects suggests that where they exist it is much more substantially at much more substantial effective rates.

  30. One advantage of high marginal tax rates is they take the sting out of variability in income. Think about a hard working business person whose income goes up and down according to events beyond their control. Their income has a high variance and no one likes the risk of a high variance income. But suppose they are in a 50% MRT. They lose half the gains when their income is going up but when their income goes down their after tax income only goes down by half as much.

    It sounds symmetric, but is not. The variance of their after tax income is just one quarter the variance of their before tax income. This is a real benefit. The bigger the marginal tax rate, the bigger the benefit.

  31. @ChrisH

    If you are a high flying professional you get your jollies from your work. Income is important but no surgeon or professor is going to work less hard just because a bit more gets taken out of their pay in tax. The job is its own reward.

    But if you are, say, a cleaner of toilets you work for the money and for no other reason. If you are losing half your pay if you do the extra shift you might well decide there are better things to do with your time.

  32. If a person earning $1m annually cuts their work effort by 10% then social output drops by $100,000.

    No, because if you’re exactly equating the wage a person gets with the benefit their actions accrue to the community — and you have to be, if the social benefit of ten percent of their effort exactly equals ten percent of their wage — then the wage exactly/precisely/definitionally captures all the value and there are no externalities, negative or positive. If they’re producing a million dollars of value and receiving a million dollars worth of value then the net value the rest of society receives from their work is, well… a million less a million, innit. Exactly.

    And if they cut their effort by ten percent… ten percent of nothing is still, you know, nothing.

    A worker produces value for the community, for “others”, to the — exact! — extent that their wage is less than the value they produce. The value of their production that they receive is value that they receive, and thus is value that others — “community” — definitionally cannot receive.

    [this is, for example, why my boss charges clients more for my labour than I personally receive, and so forth.]

  33. I am assuming workers are paid their marginal product so that small reductions in effort are valued at wage*reduced effort.

    If labour markets work at allshould be roughly true.

  34. I am assuming workers are paid their marginal product so that small reductions in effort are valued at wage*reduced effort.

    Same problem: if a worker gets paid their marginal product then the net social value of their marginal work is … marginal product less marginal wage… but you’ve just equated marginal wage to marginal product, so definitionally you’re left with… zero?

    It’s the same damned answer, only with the word “marginal” inserted as appropriate. If people get paid their [marginal/full] product, then the net [marginal/full] social benefit, [marginal/full] benefit less [marginal/full] wage, is zero.

    Only if a worker is paid less than their productivity is there a net social benefit to their being employed.

  35. Or: if you focus on the margins for wages and effort, you have to focus on the margins for net benefit, as well. If you look at marginal wage and overall benefit, you’re comparing apples and oranges.

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