Topsy Turvy

1. The Centre for Independent Studies are calling for an inheritance tax (in the form of recovering student debts from deceased estates).

2. Labor and the Greens are opposing it.

Remember, you read it here first.

(FWIW, I support the CIS on this one. Andrew’s paper is well worth reading, as is the discussion of his experience with Red Symons and the Australian media.)

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8 Responses to Topsy Turvy

  1. My friend Andrew L. is being mischievous here – though the inheritance tax criticism is one a referee for the paper made as well.

    The old HECS system was, conceptually, closer to a tax than a fee – it was set by the government and went to the government. However, the new student contribution amounts are set by universities (up to a limit set by the Commonwealth) and go to universities, and in full-fee places universities have no ceiling price. These are, conceptually, debts like your phone bill or your mortgage repayments, and like these should be paid by the estate on death. The tax system is a mechanism for collecting the money, but the money collected is not tax.

  2. Sinclair Davidson says:

    LoL. See discussion here.

  3. spog says:

    One of the more difficult to understand (at least to me) aspects of HECS debt recovery via the tax system is the “sudden death” style of its implementation. Cross the magic threshold by $1, and the HECS repayment applies to every dollar you earned to that point. It then does this several more times as private income rises, sending you backwards financially at each chop.

    Oddly enough, the Government uses a similar scheme for the medicare surcharge, but there it’s made blatantly clear that this “punishing” aspect is meant to dissuade people from being without private health cover. I’m not quite sure why the same basic design can be used as a behaviour changing tool (via financial pain) in medicare, and then be expected to have people happily cross the thresholds in the HECS setting.

  4. Spog – I am not sure why this kind of repayment system was introduced. My best guess is that like the fake ‘discount’ for paying upfront (ie, there is actually a surcharge for not paying upfront) it has been done to enhance acceptance of the scheme. Say your salary increases from $54,500 to $57,500, pushing you from 6% to 7% of your income in repayments. For this to be revenue neutral to the government if the repayment rates applied only to the income above the threshold the rate would have to be more than 7%, because they would lose the value of the extra 1% of everything below $54,500. So this scheme looks cheaper to the punters, despite sometimes having the perverse effect of cutting your take-home income even though you earn more.

  5. Matt Canavan says:

    What’s really strange about the Greens’ opposition is that they support:

    an inheritance tax on estates with a total value above $2 million and including the family home

    See here.

  6. Andrew Leigh says:

    Andrew, you’re being too coy. Sure, we can quibble about whether garnishing earnings to recover a debt is a tax or not, but there’s nothing to be ashamed of in supporting an inheritance tax. It is, after all, a less distortionary means of revenue raising than income taxes.

    As to the sudden death threshold, it’s a classic equity/efficiency tradeoff. If you want an average earnings threshold, you have to have sudden death, or people will never pay it back in a reasonable time frame. Bruce Chapman and I will have a paper out in a few weeks which uses a sample of taxpayer records to look at the effect of this threshold on behaviour.

  7. spog says:

    I’ll have to look out for that paper, Andrew. The impact of the sudden death approach on people’s willingness to earn just a little more has intrigued me.

    I mentioned medicare as an example of where the same approach is used as a punitive measure. Medicare also provides an alternative. The standard levy is 1.5% of taxable income, but people on low incomes pay no levy. Rather than hit them with “sudden death” when they exceed the threshold, medicare uses a shade-in scheme at a rate of 20% until the levy catches up with where it should have been had the 1.5% been applied from $0. I wonder whether this kind of approach would be better for HECS recovery?

  8. Andrew – I am not against inheritance taxes (as part of a package to lower marginal income tax rates), but I think how these student fees, and therefore the consequent debts, are classified is important, for one in-principle and one tactical reason.

    The in-principle reason is that a central thrust of my argument for higher education reform is that prices have positive microeconomic effects that are absent from tax-based systems (in their press release, CAPA again trotted out the argument against fees that graduates pay more in taxes anyway – as if the effects on income distribution are the main thing at stake here).

    The tactical reason is that though it is not intellectually sound, the aversion to inheritance tax is deep amongst people who might otherwise support my proposals for reforming the student debt system.

    I will also look forward to your paper with Chapman.

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