To compare, or not to compare?

The CIS’s Peter Saunders in The Australian in 2004 urging policymakers to cut taxes, because our top rate is higher than in other countries:

The tax on higher-income earners is vicious. It is outrageous that people earning $62,000 per year are paying the top rate of tax.

The top tax bracket was worth 15 times average earnings in 1960; nine times average earnings in 1970; three times average earnings in 1980; but is just 1.3 times average earnings today. UK workers do not pay the top tax rate until they earn $73,000. In France it is $77,000; in Germany $85,000; in Canada $110,000. The Japanese top rate starts at $210,000. In the US it is $395,000.

Not only does our top rate cut in too low – the rate itself (48.5 per cent including the Medicare levy) is much too high. In Britain it is only 40 per cent; in Germany it is 45 per cent (and coming down).

Peter Saunders in The Australian today urging policymakers to cut taxes, and arguing that cross-country comparisons are irrelevant:

The Treasurer maintains we are a low-tax country. He points to his recent report comparing Australia’s tax burden with that of other developed countries. It showed that overall our Government soaks up about the average amount of tax for all western governments, although Japan and the US manage on significantly less.

But the question to ask is not how our Government’s record compares with European spendthrifts such as Sweden or Belgium.

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14 Responses to To compare, or not to compare?

  1. spog says:

    Peter’s comments are part of his longer piece on “Tax Freedom Day”. It would be interesting to be able to calculate “Net Tax Freedom Day” as well. This would take into account transfer payments back to households.

    Maybe that date would be a better comparison across the years. It’s somewhat less blind to changes in Government delivery preferences in the tax-transfer system than is Peter’s.

    Perhaps we could refer to the period between Net Tax Freedom Day and Tax Freedom Day as “Churn Season”?

  2. Andrew Norton says:

    I seem to spend a lot of time defending Pete from blog attacks. He thinks international comparisons are of some value in both articles, but argues in the second (as he has before) that Australia only comes out as low tax when compared to an OECD average affected by the high-tax European countries, when he would rather compare as to Asian countries or the US.

    Spog – These dates are a little misleading; since the tax burden is heavily skewed to the top 20% of income earners. So they are still waiting for their tax freedom day, while many others had theirs long ago. Since Saunders’ main argument is against churning, however, the gross tax freedom day makes sense for his purposes.

  3. spog says:

    I would have thought that as Peter is known to be against churning (as far as is practicable), flagging both dates would help make that aspect of his argument.

    In any event, if it’s okay to use one date for tax free day, it’s equally valid to use one date for net tax free day. Or is there some clever reason why not?

  4. spog says:

    The posting times are an hour wrong on this site. Has daylight saving not left the building?

  5. Andrew Leigh says:

    Spog, thanks for the reminder. By the magic of time adjustment, I’ve fixed it before you even raised the query.

  6. Sinclair Davidson says:

    International comparisions are important because the revenue-lobby are always making them, however, even if the weighted OECD average was higher that ours (it isn’t) Australia should still lower the top marginal rate (to at least 30% IMHO).

  7. Andrew Norton says:

    Spog – I don’t think anyone has suggested this before now. If you can do an intellectually defensible calculation I promise to publish it on Catallaxy.

  8. Patrick says:

    Of course, Andrew realises a) that Peter is not wholly disclaiming international comparison, but preferring relevant to irrelevant; and b° that he is right.

    In the context of our personal income tax system the relevant countries are those with whom we are competing for high-earners and their companies. Our overall tax system, invites comparison with both those countries that are performing economically (suggesting something to gain by emulating them, at least theoretically) and those countries with whom we are competing for investment.

  9. spog says:

    Well, before I invest any time in trying to do that, perhaps you could comment on the “intellectually defensible” nature of this approach:

    1 Find the amount paid in transfer payments by Centrelink, Veteran’s Affairs, etc, over a year;

    2 Deduct this from the tax collected figure used in the original calculation;

    3 Use the new (net) tax figure and recalculate using the same method as in the original

    The result is the net tax day.

  10. Andrew Norton says:

    Spog – OK, but what do we get at the end? Cash in pocket day?

  11. derrida derider says:

    Jus what do you include in the “net”? The amount of welfare received by the average person? The average amount per person of welfare received? These are radically different figures in Australia precisely because we target our payments. The first is surely what you want, but near impossible to calculate (the nearest approach to it is the ABS’ Fiscal Incidence Studies (the last one is here, but an updated and arguably better one will be relased Real Soon Now), though it’s still unsatisfactory on several levels), while the second is irrelevant. In any case, why would you not include other things than welfare that people get direct or even indirect benefit from their tax dollar – eg Health, education, roads, defence, etc, etc. If you want to ignore these problems , the OECD has done most of your work here anyway.

    In short, I think Tax Day is a bit misleading, but Net Tax Day would be conceptually incoherent .

  12. Benjamin O'Donnell says:

    Why are we comparing ourselves to Asian countries when it comes to tax?

    Surely we should compare ourselves to the societies we consider ourselves to be similar to – or to which we aspire to be similar? Asian countries would seem to me to have a totally different attitude to welfare, social security, etc to us. I’d say Britain is a good comparison – and even after the much vaunted Thatcher “revolution”, they are a significantly *higher* tax country than us!

    It seems to me that what the recent research has shown is two apparently paradoxical things: (1) Australia is one of the least taxed developed countries; but (2) it has one of the highest top rates of income tax of all developed countries. This seems to me to suggest that Australia has one of the most progressive (in both the economic and political senses) tax systems in the developed world. I also think, when one looks at the quality of government services in this country, it says some relatively complimentary things about the efficiency of Australian governments at spending public money.

    As for who we are competing against for high earners, surely that competition is about a package of tradeoffs? Sure, you can live in Hong Kong on a very low tax rate, but there are a lot of social and lifestyle downsides to that choice (at least for people with a certain commonly occurring set of preferences). Similarly, Australia offers some major lifestyle and social benefits, but the cost of that is a higher tax rate.

    The real questions seems to me to be: (1) How many new high flyers will we get (or retain) with each percentage point reduction in the top rate? (2) How much benefit will we derive from that? (3) How much will we have to either tax people on lower incomes more or provide lower quality government services in order to pay for these tax cuts to those on higher incomes? (4) How much of (2) is worth the associated social costs inherent in (3)?

    And remember, when calculating (1) you have to take into account the “feedback” that (3) will actually make us *less* attractive to some high flyers, at least as a long term home…

  13. I’m still waiting for Pete to clarify his views on churning here.

  14. spog says:

    Derrida,

    I’m painfully aware of your prowess in these matters, but nonetheless, I’m going to disagree with you about the “incoherence” of a net day concept. The notion of average welfare payments is entirely irrelevant to this tax day concept, as is family structure, etc. After all, the tax free day concept does not attempt to relate the tax collected to any kind of existing tax scale or the amounts people on whatever per capita income might come out of such a calculation would actually pay.

    It’s just about aggregates. What’s the aggregate income, what’s the aggregate tax, and from this Peter gets his date. Using the same aggregate approach, how much did the Aussie aggregation get back from the tax collected as “cash transfers”. This comes off the tax paid to give the earlier date.

    I don’t include other forms of assistance provided via taxes (schools, roads, health, etc) because these are the things that move the dates. A higher investment in services will move the tax free day (and net tax free day) further along the calendar.

    The gap between tax free day and net tax free day is more akin to the churn period in the year. If the tax system reduced that type of churning it would affect the gap between the two dates, but not change the date that net tax free day fell. This invariance in the earlier date points to a difference in the provision of services like schools, and the simpler kind of “dollar in one pocket, dollar out the other pocket” churning that tax free day attempts to capture.

    I don’t think the idea is incoherent, but having read this, my post lunch writing is heading that way…

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