In his column today, Ross Gittins dissects the reasons why the government didn’t receive a budget bounce. The short answer, Gittins suggests, is that most wage earners realised quickly that their tax cut was less than $10 a week and the big payoff went to the upper income earners. This budget was one for the Liberal base, not the Howard battlers. Peter Costello spent the best part of a year fending off the specious arguments of groups such as the BCA for a cut in the top rate, but ultimately caved in. Which doesn’t bode well for his sterling leadership qualities. Gittins also notes that the economic arguments for cuts to the top rates are illusory:
The study, Tax Cuts for Growth, is by Dr Nicholas Gruen, a former econocrat and now principal of the consultancy Lateral Economics. Gruen finds little support for the belief that high tax rates discourage work effort by high earners. After all, we know that it’s highly skilled and highly paid managers and professionals who are already working the longest hours.
All the research evidence says it’s people at the bottom end of the income scale whose decisions about work are most affected by the tax rates they face. Tax rates particularly influence people with greater freedom to decide whether to work or not to work because they’re their family’s “secondary earner” – usually mothers.
And we know that, when you take into account the way family benefits are cut back as families’ income increases, secondary earners commonly face “effective” tax rates much higher than 48.5 per cent.
This may help explain why Australia’s rate of workforce participation by females is lower than in other English-speaking countries.
One of the reasons big tax cuts for high-income earners don’t necessarily induce them to work harder is that, though they would retain a higher proportion of any extra income they earnt, the tax cut leaves them with a big increase in income without doing any extra work. They could even do less work and be no worse off than they were before the cut.
The argument that our high top tax rate makes us uncompetitive internationally is weaker than people realise. It’s true that, in a workforce of 10 million, we lose about 75,000 skilled workers a year overseas. But we have more skilled workers coming in than going out.To the extent that people’s decisions about which country to work in are affected by tax rates, it’s their average tax rate that matters, not the rate they pay on the last part of their income. In any case, research shows that tax rates don’t figure greatly in people’s decisions.
As for the gap between the top tax rate and the company rate, its significance is exaggerated. While it allows people who incorporate to defer paying tax, in doesn’t allow them to avoid it. When you try to get your money out of the company, it’s taxed at your normal rate.
Almost all developed countries have such a gap and some have wider ones than ours.
It’s a mistake to imagine that changing the tax system to give an advantage to the well-off is the way to improve the economy.
Nicholas has a post on his paper over at Troppo and you can download the full paper from CEDA.
Disclosure: I did some research assistance on the paper, though Nicholas takes full responsibility for the conclusions and arguments.
The 2006 Budget probably did wonders for recruiting …… FROM the Liberal and National Parties TO the Labor Party, the Greens, Australian Democrats, the religious parties and power groups …. and perhaps even to the sort of nasties we hitherto prided ourselves in not having in Australian politics.
I wonder what the lower income punters will think when they realise that their tax cut comes via the increase in the Low Income Tax Offset, not a “real” tax cut. They won’t see the higher LITO money until they get the refund from their 2006-07 tax return.
A tax cut from 1 July 2006 that doesn’t actually arrive until late in 2007. Yippee.
A bit like the childcare tax benefit, I think, Spog.
Kim and Spog,
Repeat after me: “It’s not real money!”
Yo.
Are the Howardistas engaging in social engineering by chucking money at stay-at-home mothers and taking it of single parents? Or are they just buying votes
And what are really up to with superannuation? You used to be able to enjoy an income stream of over $50,000 without paying any tax via super, dividend imputation etc. Last Sunday Noel Whitaker said in his Sunday Mail column that you can now earn $300,000 per annum tax free in your dotage. There is something obscene about this when poor oldies can’t get their teeth fixed.
It doesn’t look like well-considered public policy to me.
I’m at two minds about this. Of course I favour the tax cuts to the poor. But Gruen is reinforcing some myths here….
Myth 1 that Gruen is reinforcing…
The idea that the gains to be made from cutting high marginal tax rates are dependent on rich guys working longer hours. Like all these rich guys are going to give up on sleeping and that this is the only justification behind cutting high rates.
You will get great economic gains by cutting high rates and its not from rich guys suddenly working around the clock.
Myth 2 that Gruen is reinforcing….
That we can’t BOTH put the tax free threshold up to help the struggling worker AND bring the tax rates down. We can do both and we will all be better off for it.
When I say WE I don’t mean YOU. I mean WE TAXPAYERS. Since we can do both if we make most of you non-defence TAXEATERS get a real job and start sharing the burden.
Let’s see. For dinner tonight I’ll be having a medium to well-done fillet of GST with HECS sauce, and a generous side order of steamed capital gains tax and mashed petrol excise, washed down with a couple of schooners of Medicare Levy…