Yet Another Paper on Tax Reform

I have a paper out in the Progressive Essays series (edited by Emerson, Lawrence and McMullan), arguing that those who advocate lowering top tax rates are out of step with the views of most Australians. I show that (contrary to figures that are often reported) the income of the average Australian is merely $26,000 per year, which is near the bottom of the 30 percent tax bracket. Instead, I argue that we should simplify our tax filing system by allowing most people the option of not filing a return, and reduce effective marginal tax rates at the bottom, where the rates are highest, and the problem of joblessness most acute. The Oz today picks up on the filing issue.

As the first footnote acknowledges, I benefited greatly from the comments of fellow bloggers, including Mark Bahnisch, Nicholas Gruen and John Quiggin.

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6 Responses to Yet Another Paper on Tax Reform

  1. spog says:

    I notice your “three errors” suggests that not including non-workers is a mistake when working out “average” incomes. I’m not sure I agree with that. The debate is about tax rates faced by tax payers. Your argument would suggest that if only one person had to pay tax at a (fanciful)500% marginal rate in order to support 20 non-working fellow humans, there’s no issue because the average income of the 21 people is below the tax threshold.

    Or how about saying that on average, people have only one breast, or one testicle. Probably true, but rather pointless (and useless) in a gender specific context.

    I must have missed the point…

  2. Andrew – But since none of the groups you criticise are populists, there is no reason to think that they should be in step with popular opinion. And from a think-tank perspective, that popular opinion is in favour of something is reason not to touch it. Why just reinforce the conventional wisdom? The more interesting question is why democratic political parties opt for tax cuts. I had a go at answering that question in my paper on tax and spend:

    Incidentally, giving normative value to majority opinion is a rather dangerous strategy for ‘progressive’ intellectuals. It is a package that contains things you won’t like.

  3. Andrew Leigh says:

    Spog, the glib answer is that the unemployed are people too. A more sophisticated response is that we sometimes tax welfare benefits, so it doesn’t make sense to drop these folks out of the analysis.

    Andrew, I did try to be clear that public opinion isn’t the touchstone of what’s right and wrong. But that doesn’t mean we should ignore it. If I’m arguing making a case that’s against public opinion, it would be reasonable for an opponent to begin their critique with “First, the majority of Australians disagree with you”. Not a laydown mesiere, but hardly an irrelevant point.

  4. spog says:

    We effectively don’t tax welfare benefits for people without private income. There is an array of tax offsets to prevent that happening. We only tax them where there is also some other income. So no private income = no tax.

    I’ll grant you, though, that these people will have high-ish EMTRs when they do manage to get enough private income, either through welfare income testing alone, or the combination of that and taxation. However, with the exception of the partner in couples for whom FTB B is being paid, the EMTR is zero for no-private-income welfare recipients, until they reach or exceed their income test free area.

    The “they are people too” answer is amusing. I guess we should include every Australian resident in your calculation on that basis, including children. That would really bring the average down. Again, I just wonder why in a discussion about tax rates, you need to include non-taxpayers. In a broader context of EMTRs, rather than marginal tax rates alone, that would perhaps make sense.

    I hope none of this sounds “testy”. If it does it’s because, deep down, I’ve never forgiven you for getting me addicted to Google Earth.

  5. John Quiggin says:

    I liked this very much. I don’t have any comments other than those I already gave. Well done.

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