There’s been a lot of discussion in the wake of the GFC of imposing some sort of cap or limitation on executive and board remuneration. The basic idea – which was accepted by the G8 – goes to a real issue – the perverse incentives to short term-ism which impact on the management and performance of public companies (and particularly, in the current context, banks and other entities in the financial sector). The fact that there’s a bit of a populist angle is a bonus for pollies.
Whether or not what emerges is something of a regulatory dog’s breakfast is probably an easy question to answer, if you treat it as a rhetorical question, but not one of those Kevin Rudd style ones.
In today’s Crikey, Bernard Keane looks at an alternative – a super tax on high incomes – say 50c in the dollar for every dollar earned over a million.
It’s intriguing to contemplate the arguments that might be made against such a proposal. It’s much simpler and neater – and fairer than complex regulatory instruments would be. It doesn’t “distort incentives” between different professions, or different types of firms. It ought to be something that free marketeers and anti-regulation types prefer to capping salaries.
Of course, they probably won’t accept that. It smacks too much of old-fashioned social democracy, in that it restores a greater degree of progressivism to the taxation of income. For that very reason, it’s also unlikely to be taken up by Kevin Rudd. I imagine we’ll see some fiendishly complex regulation instead. That’s the thing about Ruddesque anti-neo-liberalism. Its opposite isn’t really social democracy but rather managerialist policy wonkery.
I was actually planning a post (sorry, Mark, getting round to it) on a related part of the Obama budget – an effective tax increase on those earning more than $200,000 a year by reducing their deductions.
The only problem with Keane’s proposal is that it doesn’t go down far enough along the income scale. I reckon – based on extensive econometric modeling, of course – that such a “super tax” should be cutting in after around $200-250,000 a year.
The biggest distortion with such schemes is that the more complex one’s payment arrangements, the more scope there is for avoiding the tax. So businesspeople would find the usual ways to count their entertainment and recreation as a corporate expense – think the sponsored yachts in the Sydney-Hobart each year. Does anybody really think that sponsorships on those barges earns a commercial rate of return?
Yeah. Start taxing the rich and watch investment and growth levels in this country drop off. It is these people that spend their money which stimulates growth. The reality is we are not a communist country. If persons work hard and work smart and are talented than they should be entitled to the majority of the money they earn.
Which Jamo, even under a 50% marginal tax rate, they will still get. Personally, I wouldn’t have an in-principle problem with 50% of all my income going in tax, if I was happy with the way the government was redistributing it – purely on the basis that my own individaul actions/decisions are responsible for at most half of my actual productivity.
In practice it would somewhat difficult to adjust to, given existing debts etc. etc.
Weak as water!
Make it 60 cents in the dollar for all income above $1 million, up to (say) $6 million, then 70 cents in the dollar for the next $5 million, then 80 cents in the dollar for the next $5 million,….
So: that part of the person’s income below $1 million – current rates; plus 60 cents in every extra dollar between $1 million and $6 million, then 70 cents in every extra dollar ….. etc
It’s about time the matter of progressive-income-tax-rates was raised again. Populist? Fair?
Ambi: satisfying as it would be, it wouldn’t actually raise very much money as I understand it.
We can’t tax the rich. They’ll go all John Galt on us and the economy will be rooned! rooned I tells ya!
So wizofaus, you think it is fair for a high income earner to have half their earnings taken away in tax, to be spent on handouts to low income families,public housing, public school facilities and insulation. Come on. You still havent rebutted my arguement about the drop in investment and growth that will result from such a measure.
You’re right Robert,
bring in the higher rates on income above $250,000. That’s fairer than what I proposed.
There’s always the argument that “there aren’t many folk with taxable incomes that high”. So what? It’s not only a question of revenue raising; it’s also a question of having equitable rates, as between persons enjoying different incomes.
70 cents in the dollar is not confiscatory. Is is time for a more general “tax reform” thread?
http://www.truthandpolitics.org/top-rates.php
The concept that high taxes choke growth. Say growth during the 1950′s,60′s,70′s?
The Australian rates show a similar trend. The massive drop in tax rates coincide with Thatcher/Reagan, and is an abnormality if anything.
Jamo: you are taking the mickey, right?
In what parallel universes aren’t educational infrastructure and energy efficiency not investments?
Yah, tax the rich more and you’ll see the talent drop off. Look at the brilliant minds we were able to get in this country by paying people far too much. Sol Trujillo, Eddy Groves… ah… um.
I heard someone on RN Breakfast today referring to CEOs in the plural as a “clutch”.
Jamo, you’re still dreaming the trickle-down dream. I take the opposite view… the rich make their fortunes from the public, in general. For example, by selling them mobile phone services. The more money you give the poor the more they will spend on their mobile phones… and the more the rich will make. This is called (by me) the trickle-up effect. You tax the rich and give the money to the poor who can’t wait to spend it and give it back to the rich.
That makes at least as much sense as your theory.
Executive remuneration is a matter for the shareholders & the board of directors.
If a corporation is paying too much in salary, more fool them.
Taxing high recipients is simple envy. Reminds me of kids art talent amounts to little more than drawing stick men, jealously slashing the canvases of the talented art class prodigy.
I’m not able to get a job in a corporation, and I’ll never draw salaries in the millions, but I couldn’t care less if somebody else IS paid that much.
SatP – actually, surely the main advantage of taxing the rich more is so that we can tax everybody else less. I don’t doubt the fact that such suggestions get political support because of envy, but that’s certainly not my position (as I suggested, I think I should probably be paying more tax).
As for Jamo’s concern – the quite extensive economic research that exists shows that it’s high corporate tax rates that tend to stifle investment, not high income tax rates. I wouldn’t have a problem with seeing those lowered in tandem with higher individaul income tax rates.
SATP
the beauty of the proposals above is that they don’t intefere with pay-setting by boards or shareholders. But if remuneration is exceedingly high, the last few million $ will be taxed at a higher rate. It’s not a new idea. See “luxury car tax”, or “means tests” on the welfare side.
Envy? It doesn’t have to be: social equity is another way of looking at it. One can be dispassionate about this. wizofaus (earlier) for instance has no objection to paying 50% income tax. I think you’ll find that some people on very comfortable incomes can be quite accepting of these ideas. (Others scurry off to an accountant and/or lawyer, of course.)
The considerable legal priveleges accorded to corporations are at the discretion of government. Society allows these priveleges because it is clear that corporations are, over all an efficient way to organize economically. However they are not automatic, or natural. Insofar as society deems that the priveleges to be not warranted, either for the economic reasons suggested in the OP, or for purely ethical reasons, then regulation of corporations behaviour is justifiable.
Of course I am reminded of that Galbraith quote “We can safely abandon the doctrine of the eighties, namely that the rich were not working because they had too little money, the poor because they had much.”
If the idea is to stop the really high salaries for executives I don’t see that a 50c tax rate would work. Its really not that much higher than the current top rate anyway. Might buy a few votes though
Mind you, the luxury car tax was dumb policy.
Picking out one form of luxury consumption for punitive taxation is silly; it just means that rich people spend more on Rolexes, yachts, and holiday houses.
SATP, I wouldn’t object to salaries in the millions, if the recipients are worth it. However, on most performances so far, they shouldn’t be allowed to deliver the mail! Before any of these brigands is allowed to sit in the gravy train, they should prove they’re worth the price of the ticket.
Have to agree with Jamo. The problem is that trickle down hasn’t gone far enough. we should be reducing the incomes of the lower and middle class in order to free up capital for the rich. They will then spend it on services and stuff providing more jobs. In fact why not go back to the old traditional model where the royals get most of the money (along with various barons etc.)
Also read this lovely tale http://www.truthorfiction.com/rumors/t/taxcuts.htm
You can’t tax the rich as they supply us with so much. Like rental accomodation.
Wizofaus is torn between wanting to some people to pay more tax, thus subsidising others, and the John Howardish concept of giving breaks to the big end of town.
Anyone who supports high taxing of corporate executives is free to do so. However, those same suporters of high tax must then not be so crass as to act shocked when corporate headquarters decamp for overseas.
Anyone feeling they are not paying enough tax is not prevented from paying extra. It is quite easy. Just give your extra money to the ATO. Simple.
“Scurry” off to an accountant eh? Implying that there is something sinister about the lawful activity of keeping one’s personal finances in order. Hmmm….
As opposed to anecdote, all the research evidence that’s been reviewed in recent publications on tax reform demonstrates that there’s no “brain drain” as a result of differing income tax rates between here and overseas.
In any case, the argument’s based on the furphy that there’s a very limited supply of people who can function as top executives.
SATP: would you like to compare the state taxes in, say, California and New York, and, say, Alabama?
Robert Merkel, the point I was making wasnt that they were bad investments, it was that they wouldnt be benficial to the persons whom you are taking the money off (high income earners) and that in my opinion isnt fair.
As for wizofaus I think you made that up. Show me the evidence that lowering the tax rate for high income earners stifles economic growth.
SatP – not at all torn. The available evidence indicates that corporate tax rates have a substantial influence on investment and growth rates, and that income tax rates have virtually none.
My ideal would be a change to the tax scheme that actualy makes it significantly cheaper for companies to pay wages providing they rethink just how much should go to the top end rather than to the lowly workers. After all, it’s not as though there’s a great deal of evidence that high executive salaries are actually helping attract the best talent. The choice is then between potentially needing to find new executives (if the current ones won’t accept lower pay) and moving overseas, which usually requires replacing most of the staff.
Jamo, just about every initiative aimed at restoring some equity to the remuneration system in the past decade and a half has been met with dark talk about how it would result in “drop in investment and growth”.
Yet, none of those who prosleytise about free markets ever have an answer for the fact that biggest hit to investment and growth has been caused by excessively remunerated executives taking undue risks with shareholders’ money so they could fulfill the short-term price targets demanded of the funds management industry and thus put their call options in the money.
“Show me the evidence that lowering the tax rate for high income earners stifles economic growth”
Well I didn’t propose that, but if it were true it wouldn’t surprise me, if you accept that lowering tax rates for high income earners means either:
a) you have to tax the bulk of the population more, resulting in less consumption
b) you build up government debt, which ends up eating into future economic growth
c) you cut government services, resulting in poor infrastructure, lower educational and health standards, all which have a significant long term effeect on economic growth
FWIW however I would support higher taxes even if they did produce slightly slower economic growth, if there was a measurable gain in equity and social cohesion etc.
Without ever having given it too much thought, I always liked the ’30-to-1′ theory. The most an executive can earn is 30 times (or whatever ratio) the lowest salaried employee within the company.
Free-marketers are welcome to pay themselves more, and should have no objection to ‘floating all boats’ in practice, not just theory.
Trickle Up, Friendless @ 12. Ain’t it the truth. I have been doing this my entire life. Handing over the lion’s share of my earnings to folk far richer than I.
SATP
Mr Punch, visiting from anbother thread, used “scurry” by way of referring ONLY to those very high incomed persons who engage in artificial, sham, highly dodgy and possibly illegal income-tax avoidance shemes.
Everyone is free to use an accountant to keep their finances in order. Of course they are. It works well, generally. But tax fraud? That’s a social offence and a crime. Let it be investigated and prosecuted if clear-cut.
BTW, I don’t believe ALL rich persons or ALL high-income persons engage in tax fraud. I’m always sceptical of politicians who promise they’ll be able to harvest hundreds of millions of extra tax $ by careful investigation of rumoured frauds.
Remind me, why is it a good thing to impose extra taxes on high incomes?
I’m enjoying the loathing and disdain being meted out to fat cats in the wake of our various market collapses. If these coots had to beetle around in Barinas and dressed themselves at Target we’d all be denied the pleasure of watching them crash and burn.
And let’s not forget that for all of their privileged access to the executive suite, said coots are really only employees. Thus the lies they tell aren’t even their own.
Sad, really.
Katz,
Let’s posit an exec with annual salary of $2 million.
Please note that the next million $ (after the first million $) would be taxed at 50% [or perhaps 60% if the Pathet Lao (thanks, j_p_z) ideologues were in charge]. That would leave said exec with whatever had remained after the tax on the first million, PLUS either $500,000 or $400,000 from the next million.
I don’t believe that this exec would be reduced to driving a Barina or shopping in Target. She might be giving away Barinas as small gifts.
Higher income tax rates can still allow quite high after-tax incomes (as long as the marginal rate doesn’t exceed 100%).
I think that the issue is non principle shareholders who manipulate executive positions for excessive gain. It is possible to make a tax rate inversely proportional to shareholding for incomes over the magic million. We’ll dub it the excess remuneration tax. This might give the desired effect of not descriminating against those real business builders while dealing heavily with usurpers.
Say you have a flat corporate tax of 20%.
You have the CEO and sole owner. Currently paying 45% on top dollar of their salary.
An additional $1 million is available to the company. If it goes into the CEO’s pocket they will end up with $550K. If they roll it back into the company they will have their assets increase by $800K (but with risk that that money may never come back fully under their control).
If the CEO was paying 95% on top dollar then that additional funding will FAR more obviously go into the company for potential additional growth.
Neither case changes that the CEO has increased their worth by $X. Just where it ends up.
While we’re at it, how about some death duties?
One other thing i don’t get, is why we can’t work out tax rates according to some function a mite more sophisticated than three simple, excessively arbitrary tiers? I reckon if you earna dollar more, you pay 0.000001% more, starting at 05 for zero dollars and sliding up in some nice sinuous curve to 50% at $500 000.
Oh and while we’re at it, slash deductions and use those savings to reduce overall marginal rates.
Friendless @12,
I want a thread on the ‘trickle-up’ theory. Love it! Though ‘hoover-up’ I think has a lot of old-fashioned charm, if not quite the same satirical edge.
Inheritance tax? Yes please, wilful, and big stonking capital gains tax while we’re at it. And stamp duty on investment properties so fierce it’d make your eyes water. And burn all of those rebates and tax breaks for people in brackets high enough to already pay tax. Oh yes, I could go on.
I don’t see the appeal of having so much revenue dependent on rich people paying tax, though. As Rob Merkel and others have pointed out, the rich have ways of making their money disappear.
I prefer the idea of removing deductions rather than increasing tax rates. Sure, it penalises the highly skilled more than honest people, but I can live with that. See, being skilled at manipulating the tax system is not something that I think society should reward any more than we reward skill at poker or javelin throwing.
Speaking of which, isn’t it time the AIS started using HECS and stopped sucked at the tax teat? $11M for a gold medal is a bit rich IMO.
FWIW, count me in the “expects to pay more if they lift the top margin rate”, and is happy about it. If I went back to NZ I’d pay less tax… coz I’d earn a lot less. I can cope with the extra tax
Ambigulous: “…if the Pathet Lao (thanks, j_p_z) ideologues…”
Hey man, don’t drag me into this, that was that other dude.
Meanwhile, for your diversion and amusement, a visit to a mirror factory…
“See, being skilled at manipulating the tax system is not something that I think society should reward any more than we reward skill at poker or javelin throwing.”
.
Professional gamblers don’t pay taxes but get no deductions either.I’m not sure of the inability to claim extends to office costs – I’d think not .
Can’t comment on javelin throwers but if they reside outside Aust for 6 months each year neither do they for earnings outside this country.If you are making money as a javelin thrower I’d also hazard a guess they are doing plenty of shopping overseas.
Precisely. Anyone earning $250K plus is going to hire a good accountant, and when you have a corporate rate of 30%, and impose a top marginal rate of (say) 60%, they’ll find a way to corporatise the income. Not to mention rorts like negative gearing, or the 50% GCT discount.
If you want to tax the rich you have to plug all the holes in the tax system first.
Actually it’s relatively difficult to corporatise income from what I understand.
You could argue it’s done by proxy by using corporate funds to purchase goods/services that are to a significant extent for personal use, but if that’s the case, what on earth are these CEO’s spending their multimillion dollar salaries on?
40 murph the surf.
Murph, are you really sure that professional gambling is a tax-free exercise?
I tell you what if social-democrats don’t seize the day and take from the rich and give to the poor then us libertarian-socialists sure will!
I don’t want youse to fail again like youse have for the last 100 odd years – but us anarchists always have to prepare for the worst case scenario.
Its part of our neo-religion.
You understand incorrectly.
That is the opinion of the professional gamblers I know but it has a caveat – if you are too methodical and successful – you become like a small to medium enterprise then the ATO takes an interest.As individual gamblers- small home office ,maybe 1-2 staff they aren’t asked. Didn’t get to claim any costs.
Professional Gambling isn’t defined in the tax code. Only “operating a gambling business” which historically is applied to bookmakers.
As for the tax plan, it’s a great way to make people move to Hong Kong.
…..the argument’s based on the furphy that there’s a very limited supply of people who can function as top executives.
Nail on head, Mark@22.
Why do we continue to swallow this giant con that all CEOs are geniuses at business, and worth the millions they run away with, laughing all the way to the bank.
Take a good look at Eddy Groves, Sol Trujillo, those shabby old tory bankers apologising to the english parliament for not knowing what they were doing, those greedy american neocons treating themselves to personal jets and parchment garbage bins as the GFC exploded around them, and the long long list of mediocre carpetbagging CEOs that have paraded through the corporate world, to choruses of media adulation, over the past few decades, since “axing” jobs became the very definition of corporate genius, fer chrissakes.
Why is sacking people considered a talent? I could do that, even without a Harvard MBA and a $30M paycheck.
Most of these dopey charlatans could not fight their way out of a wet paper bag, let alone come up with a good idea or a productive proposition on their own, and I would not give tuppence for any of them…
It seems rather curious that contributions to “social equity” should only be measured in one particular unit, money. It’s too simplistic to propose taxing the rich in terms of money, because they have it and they seem to care about it. But if everyone is to pay their fair share in terms of common sacrifice, in order to achieve “social justice” and “equity,” I see no reason why others who do not earn a lot of money (an index in effect of whether or not they care very much about it) shouldn’t be equally taxed in kind, in units of the things they actually do care about: valuable things like free time, self-expression, work that is enjoyable or consonant with one’s talents or desires, or the ability to lead a life of the mind free of troublesome manual labor and scut-work. Why should scut-work only be done by the uneducated? Shouldn’t the intellectuals contribute their “fair share” of tedious, repetitive, mind-numbing work-weeks in order to ensure the “social equity” which they desire?
Let’s say that for the intellectually-inclined, getting a standard four-year uni degree is the equivalent (in terms of things one values) of earning a base salary of up to $250,000 per year. So, no additional tax for that. But in the interests of social equity, if the rich are to pay much higher tax rates in cash, let us also declare that for every year spent pursuing an advanced degree beyond the four-year degree, an academic should have to contribute six months of their time working at nasty low-paid jobs, which after all, are always needed by society.
On analogy to the 60%/70% etc. “progressive” tax, pursuit of a degree beyond a master’s should be taxed at seven months of corvee labor per year of study; gaining a tenured academic position should be taxed at a contribution of ten months of annoying scut-work per year of academic practice. It’s progressive, right?
Your thoughts?
Correction: this is the main angle for pollies.
Politicians ought to be regulated or banned. You can keep one for years but they are still wild animals and will stampede you mercilessly if they see the herd moving suddenly.
The real issue is that it plan bloody stupid to offer people top dollar to do a job even if they don’t do a good one. I’m not sure how effective a cap on salaries will be. Won’t they then just relocate to [insert tax haven here]?
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Greater transparency in corporate government would be a good start. Since more and more of us are investors it would be good for us to exercise our rights to vote and not ave to gift them to some technocratic proxy for the AGM that will take place in [insert name of hard to get to country here].
Dan Swift – #47. My thoughts? Good joke. I hope it’s a joke.
@47 -
Where the economy is going gangbusters?
From a research paper by Nick Gruen for CEDA (a business think tank):
This paper draws on evidence and research, not ideology and anecdote.
http://andrewleigh.com/?p=144
Do away with remuneration consultants (hey, not sure how, maybe push them out to sea or something). Are boards going to bid up executive salaries in the absence of helpful advice that says ‘just this much’?
Mark, unless I am misunderstanding Nick’s paper, it was looking at where in the distribution tax cuts would have the greatest effects on work incentives, not specifically what the impact of raising marginal tax rates at the top of the distribution would have. Can you point us to any of the simulations that Nick conducted that would shed light on that question? FWIW, I doubt that lifing the top marginal tax rate to 50% for earners over $250k would have a large impact on incentives to work for such people. However, I would attach a couple of caveats. First, large wedges between the company tax rate and the top marginal tax rate have the potential to significantly increase incentives to incorporate for those in the position to do so – but again, the size of the likely leakage is an empirical question. Second, the impact of changes in marginal tax rates on work and investment incentives can be highly non-linear. For that reason I would be cautious about claims that because a 50% marginal tax rate would have relatively small effects, a 70% tax rate would also have small incentives.
Mark @ 53 – That doesn’t seem to be available to read for free. Do you know if they considered that corporate HQs may move overseas? Many international or Asia Pacific companies don’t need to be headquartered in Australia. And on an individual basis if you work for an international company its generally not that hard to work from a low tax country for a while if you want (eg vest shares or get bonuses paid while overseas for a year and then move back). Certainly was quite common during the .com times.
LO, Nick specifically looked at and rejected the argument that income tax rates led to highly skilled (and/or highly paid) workers moving overseas to escape them. I remember because I worked with him on the paper doing some of the research groundwork. Unfortunately, it’s no longer on line for free. I think he also looked at the so-called “incentives to incorporate” – and concluded they aren’t there for employees who are in executive positions in private enterprise.
Chris, sorry, I can’t recall.
I’m pretty sure my recollection is right because I do remember discussing this aspect with him. However, he would obviously be best placed to tell us!
Mark – think about it this way – if Australia introduced a marginal tax rate of 90% for any income earned over $250k – do you seriously believe that it wouldn’t impact work and location decisions for earners above that threshold? The idea that income tax rates have NO effect on such decisions seems a bit far-fetched to me and I’d love to see the detailed econometric evidence that would support such a claim. Given that Australia’s top marginal tax rate has been less than 50% for more than 2 decades now, I think it is rather unlikely that Nick’s study would shed any light on the impact of very high marginal tax rates on location and work decisions. He certainly wouldn’t have been able to utilise any natural expirments to estimate the impact of large increases in marginal tax rates in Australia. So, while I find it plausible that the effect should be small for lifting the marginal rate by 8 percentage points, I don’t find it plausible that the same implication would follow for say a 20 percentage point change. It would certainly be contrary to the international evidence concerning the impact of extremely high marginal tax rates on such incentives. You should also be aware that the impact of very high marginal tax rates cannot be thought about only in terms of the short-run – they are also likely to impact on the incentives to accumulate human capital and the incentives for entrepreneurial activity. I also think you aren’t taking into account how many people that earn say over $250k aren’t executives but other types of very well paid professionals and people in non-salaried employment. You can’t just have a different tax rate for “executives” – it would have to apply to anyone earning over a given threshold to avoid gaming the system through the reclassification of jobs.
Anyway, is there a way to obtain his regression results? As an econometrician, I’d love to see the specifications he has used so that I can think more deeply about how applicable his study is to the debate we are having now….One thing I know from my own research is that no empirical evidence can be accepted at face value without a careful examination of the empirical research design and how the study achieves unbiased identication of the parameters of interest….
No one is arguing for that though, LO. As noted by a number of commenters, the 50% over a million proposal is very mild.
I do have a copy of the paper on the hard drive of an old computer, but it would be a bit of a pain to dig it out!
I’ll email Nick and let him know about this discussion. My recollection may not be exact, and in any case it would be better for him to discuss econometrics, in which I claim no expertise.
I happen to have a copy of the paper sitting on my hard drive! I’ve just had a look at it.
He wasn’t specifically trying to estimate the effect of tax cuts on higher earners per se.
His main argument concerned whether you would better increase labour supply by reducing marginal tax rates at the top or the bottom. He found that labour supply was more elastic at the bottom:
Incidently, Labor Outsider, I’ll have finished a major in econometrics this semester. Got any tips for an aspirant to the elite and peculiar ranks of the econometrician?
j_p_z: I thought it was you who penned a limerick nearby which (inter alia) compared your LP buddies here with Pathet Lao? If ’tweren’t, I retract.
Dean Swift: your modest proposal has a good deal of merit, and will be applauded by many non-academics who deride the groves of academe. Will it gain wider approval than your bonzer scheme where Irish babies were to be suckled and fatteneed for the tables…..
but I digress; perhaps you don’t digress?
You are certainly correct to point out that money is not the measure of all things (even in society) and a coarse and crude yardstick indeed. Some blame Cardinal Marx, others attribute that focus to the hungry effects of poverty, scarcity and dire necessity.
Thanks, Paulus.
Helen @ 11 – surely a grasp of CEOs would be a more obvious collective description.
Does anyone know whether there is a way of exchanging email addresses without making it available to everyone?
Mark, I think you have my email address. If Paulus emails you, would you be able to provide my email address to him? That way he can send me a copy of the paper, and I can offers some advice on econometrics.
And yeah, I know that nobody is propsing a marginal tax rate of that magnitude – I was just using it to illustrate my point that the claim that increases in marginal tax rates has no impact on incentives as the top of the income distribution was a little strong.
From the quotes that Paulus has provided, it seems like perhaps the evidence from the paper is being used to draw conclusions that are stronger than Nick’s research really supports. That said, there isn’t much point in me saying much more until I have read the original paper, and FWIW I am a strong believer that the biggest priority for tax reform is lowering effective marginal tax rates for those in the bottom half of the income distribution.
Cheers
LO – if you and Paulus are both using your actual email addresses in the comments field, and both of you are happy to do it, I can put you in touch. Maybe Paulus could leave a comment or send me an email?
I would be totally in agreement with raising the top marginal rate to 50%. My reasoning is as follows.
There are basically two groups of people who will be earning this sort of money:
a) Entrepreneurs and inventors. I don’t begrudge these guys and gals the money they make: it directly and tangibly contributes to economic growth. But most of their rewards will come as capital gains. Now, CGT has a 50% discount, so effectively they only pay 25% tax on the growth of their business. That’s fair enough.
b) Everyone else: executives, lawyers, senior accountants, etc. Many of these fine folk will simply not be able to leave Australia because their practice and their clients are here.
Some will be able to transfer their careers overseas — but so what? There are and were, even before the GFC hit, only a relatively small number of top executive and partner slots. And there are many hungry and smart people just beneath them.
If Sol and the entire senior executive of Telstra were wiped out tomorrow in a plane crash (God willing!), they would quickly find appropriate people to replace them. The fear of all our talent leaving the country is a chimera.
Heck, I don’t mind putting out my address for all to see!
aorpaul at yahoo dot co dot uk
(Though if LO turns out to be an internet viagra salesman, I will never forgive you, Mark!)
Heh!
Cool – I will send you an email – I actually think internet viagra salesmen have more credibility than economists in some circles these days….
It will do a fair bit for social cohesion if we introduce a new high level tax rate. It’ll also trim the sails of a few who confuse good fortune with their own abilities. Which is a good thing because corporate hubris is another catalyst for any boom.
Viagra salesmen have much better form, when it comes to accuracy in predicting when things will rise.
What wbb said. I think we should be aiming for whatever promotes social cohesion rather than see it as a money raising idea.
I thought more money in more people’s hands would create more demand and so forth. But I can see that we can rely on the much fewer wealthy to throw their money around to create demand instead.Or maybe pray they may build something…and we will come.
It is of course nonsense to suggest taxing the wealthy or very wealthy more will freeze development. Why, it just might keep more money in companies for use on other things.
I think the envy is mostly the other way and has been for thirty years. The very rich and the powerful jealously guarding their positions and seeking at every opportunity to increase it.
The jewel in crown would have been WorkChoices MkI MkII etc which would have basically delivered cheap flexible faceless work units to business to use at their leisure.
I did have a suggestion elsewhere that a similar amount should be divided up among the wage earners of a company as is paid to Executives in value/bonuses. Thus a $3 million bonus to an Exec would mean the company would have to also give $3 million to staff divided equally. Thus a thousand staff get $3,000 each. Now wouldn’t that be fun to see.
Thomas that is a brilliant suggestion. After all the staff is equally responsible for the successful operation of a company, so should share some of the rewards
Reining in corporations is something that appeals to me very much.
However envy taxing executive pay isn’t the way to do it.
You want to stimulate investment & the same time boost employment? Simply remove payroll tax.
Just had a thought. Why is it now socially acceptable for us to make the arguement that we can’t cause even the slightest impost to the rich because they will bend, ignore or break the law (and we accept this.)
And yet on the other end of the scale if a man were to walk into Franklins or Wollies and shoplift a loaf of bread to feed his hungry family we’d be all over him like a rash. None of this “oh we can’t charge shoplifters for stealing necesseties. They’d just do it anyway.”
What kind of a world has it become when we tell those who don’t need more to take whatever they can? Imagine if the French Revolution used that logic.
Heh, if I wanted to make a facile argument against taxing the rich…
Te UK top marginal rate was moved from 40% to 45% just last year. The country immediately fell into recession…
As for the suggestion that the rate should be 50% on incomes over $1m, that’s exactly what the Greens here tried to push through the Senate last year. It was defeated by both the government and opposition.
Good on you GP @ 48, I’m with you all the way there.
“Why is it now socially acceptable for us to make the arguement that we can’t cause even the slightest impost to the rich because they will bend, ignore or break the law (and we accept this.)”
That’s not the argument people are making. It is not illegal to negative gear or to corporatise your income. It’s just ridiculously easy, which is why increasing personal tax rates would never work.
Where the economy is going gangbusters?
No, but the top tax rate is still 17%. So in an economic hard time like this, taking a lower salary in Hong Kong will mean you earn more than a high one in Australia.
From a research paper by Nick Gruen for CEDA (a business think tank):
Disincentives to work and tax emigration are two completely different things.
Yes, Australia’s taxation system is horrible both at the lower and upper end. No, high income earners will usually not go on the dole rather than work. They will emigrate, which is what high salary-earners would do in the event of a tax like this.
As others have pointed out…some will emigrate, but they’re probably already the sort of people who do everything they can do minimize their tax. I don’t think Australia will be terribly much the poorer for such a loss. There will be plenty of others willing to fill their shoes, who are arguably more likely to mindful of someting else other than their own personal bank balance, which I hardly see as a bad thing.
wbb/Brian – why do you think a higher tax rate would increase social cohesion? The rich in the country are still going to be outrageously rich compared to the average in the country. Does pulling down people who are better off than us really make us a more cohesive society?
wizofaus – its not just a matter of people personally emmigrating, but its those very same people who influence where companies have their offices and with them the associated lower paid jobs. I don’t expect a 50% tax rate to change much at all, but something substantially higher will influence where offices are located.
Sure, Chris, and I wouldn’t anything much substantially higher at this point.
As for social cohesion, if the extra revenue is put entirely toward helping out the least privileged, there’s very good reasons to believe this will help reduce obvious signs of social dysfuncion – crime, corruption, exploitation, and whatever simmering resentment (or envy, call it what you will) might be boiling away beneath the surface.
wizofaus – its not clear that there would be significantly higher revenue though – not in the amounts that would be required to make a real difference. And a tax rise is the sort of trigger that gets people to chat to their accountants about what they could be doing to reduce their tax.
I’d guess that a GST rise is much harder to avoid and you can compensate lower and middle income earners through payments and tax reductions. But it doesn’t have the political benefits.
I’d agree that a 50% rate on income over $1m wouldn’t raise much extra revenue – but my proposal would probably be 50% on income over $150K. Any care to make an estimate of how much extra this would raise?
wizofaus,
In the Gruen paper mentioned earlier, he estimated that cutting the top rate by 1% for income over $150K would cost $663 million of lost revenue in FY 2009/10.
So as a back-of-the-envelope type calculation, increasing the top rate from 45% to 50% might bring in around $3.3 billion per annum.
Not huge in terms of the overall Federal budget, but you could still do some worthwhile projects with that!
wiz,
“50% on income over $150K”
~$5 billion extra
$200K, ~$3 billion extra.
(based on 2005-2006 ATO stats)
Or, every high-earner would pay a very, very loose average of an extra $27k in tax.
Is that worth relocating your entire family overseas to a country where property prices are likely to be a at least double what they are in Australia?
What about your entire office, when the same is true for the cost of commercial leasing?
If you had two kids at private school, a lot of that $27k was just swallowed up in what you’d pay extra for school fees overseas, or alternatively for the cost of boarding them in Australia.
Nick @ 87 – no, but the situation changes if you implement 60-80% rates which have been discussed here. The 50% rate is only 5% higher than what people in the top bracket pay already so its unlikely to change behavior that significantly.
“Is that worth relocating your entire family overseas to a country where property prices are likely to be a at least double what they are in Australia?”
There are no such countries – property prices in Australia are among the highest in the world. Additionally, most multinationals who employ expats on the sort of salaries we are talking about provide them with accommodation in any case.
“The 50% rate is only 5% higher than what people in the top bracket pay already so its unlikely to change behavior that significantly.”
Good, then there’s no real argument against moving to 50% above $150k
Yet, as Paulus mentioned, that would still net a significant amount of new revenue.
As for higher brackets/earnings, say 60% for over $1m, we’re talking about a tiny handful of Australians (~6000) – an additional >$1billion in revenue – and I completely agree with Mark and grace that furphies abound. To employ some bluntish RWDB-speak, if those 6000 don’t like the system in Australia, they can feel most free to piss off. There are many, many capable others to readily take their place.
Would Porsche have fallen in an utter heap if Wiedeking had decided to relocate overseas, rather than paying an extra €10.5m tax on his €70 million yearly salary package?
I don’t resile from the “60-80% rates which have been discussed here”. (Chris)
Rate stays the same for first $1 million.
On the next $5 million, ATO takes 60% ($3 million) while taxpayer retains $2 million.
On the next $5 million, ATO takes $3.5 million, taxpayer retains $1.5 million.
So if her pay jumps from $1 miilion to (say) $11 million, the taxpayer gains $3.5 million [yeah, I know, it's PEANUTS] while Govt revenue increases by $6.5 million. It still should leave plenty of spare cash to pay school fees for a tribe of childremn and grandchildren. And a Barina for every gardener and housemaid.
In the wider scheme of things, it sounds fair to me.
Nick @ 90 – I’d have no substantial objections to the introduction of a 50% rate @ around 150k as long as they also introduce legislation to automatically adjust the thresholds for the tax rates with inflation. At the moment we effectively have a tax increase every year that they don’t change the rates.
I actually very much doubt that Rudd would introduce a new rate at around the 150k threshold – given its so close to where he’s set the threshold for middle class welfare. I expect that the tax cuts scheduled for this year will be cancelled for
the high income earners though.
Ambigulous – do you think such changes would really lead to increased social cohesion? Or is it just a bit of old fashioned class warfare?
What is ‘social cohesion’? To lefties, it seems to be inextricably associated with progressive taxation and redistribution.
The great thing for the left about ‘social cohesion’ is that there is no way of measuring it, so they can just assert that higher taxes = greater social cohesion and never be proven wrong. It’s like ‘the national interest’ or ‘un-Australian’, one of those meaningless terms that gets reeled out to support whatever barrow people happen to be pushing.
Required, actually that’s not true – there are are number of papers that examine the effects of income inequality on factors such as crime, corruption, and community “disconnectedness” (for want of a better term). Virtually all of them show a measurable positive correlation.
Neither. It’s just a convenient way of raising a bit more cash we can put towards things like public dentistry, universities, solar power, or whatever. Or help pay off the deficit arising from the stimulus package.
The Federal Government is likely to have legitimate requirements for more revenue over the next few years. And since there is, presumably, diminishing marginal utility from income (ie you run out of things to spend the dough on), I see no problem with increasing — by a small percentage — the contribution of high rollers.
Analytically, I think we should separate the revenue raising aspect of the idea from the distributional aspect.
If all you were interested in doing was raising additional revenue, it would be far more efficient to raise the GST than raise the top marginal tax rate because consumption taxes are less distorting than income taxes. It is also the case that those estimates on the additional tax that would be raised are upper bounds because: there will be some impact on labour supply; there will be some leakage into company and other taxes as those high earners that can rearrange their tax affairs; there will be some effect on business and individual location decisions. All of those may well be small, but when estimating the impact of tax changes you have to take into account the behavioural impact of the policy under consideration. They are also empirical questions (and after looking at Nick Gruen’s paper it is clear that his paper does not make any attempt to rigorously estimate those effects for Australia.
In my view, what is really at issue here is less an economic question as it is a moral question. Many people feel that the distribution of income is too unequal in Australia, that the tax system should be more progressive, and that the lack of progressivity undermines things like equality of opportunity. It is a question of the type of society that we want to live in. For example, I would accept a slightly lower rate of potential economic growth in return for more progressivity, but I wouldn’t accept a significantly lower rate of economic growth – that reflects my own broadly Rawlsian views of what the social welfare function looks like. That means that I would accept a 50% marginal tax rate above $150k (but with the threshold indexed to the CPI), together with reduced EMTRs for low-income and second earners. Others would be prepared to make different tradeoffs according to their own moral perspectives.
However, I do suspect that one consequence of the GFC is that politically it will be easier to obtain acceptance for more progressivity in the tax system than was previously the case – I doubt that the ALP has the bottle to do it though.
Chris: I didn’t adnvance “social cohesion” as an aim. I’m interested in taxation fairness. I believe it’s quite possible (indeed desirable) to hold such views and remain dispassionate about them. “Class warfare” is not my aim. Of course, in the heat of political battle all kinds of envy, malice, hatred etc may be aroused. But I think a Kevin Rudd type of pollie could make the case calmly without resorting to base motives.
Nonetheless, I don’t dismiss the fostering of “social cohesion” as a worthwhile aim. A pity it seems to take a natural disaster to draw fellow-feeling and selflessness out of us….
A higher tax bracket also provides an incentive in the form of an aspirational target for those in the second rung to do better. eg I was mightily pissed off when they raised the threshold for the top bracket a while back and I was relegated to Division 2.
Move overseas? How many are going to disrupt their whole family’s way of life simply to reduce their taxes by moving somewhere where the civilised delights of user pays will quickly claw back any paltry gain. A few youngsters with itchy feet who’d've gone anyway.
I notice Shawn Carney in the Age today thinks that “>legislation can’t fix extreme incomes, supposedly because it’s due to lack of morality. But surely murder is due to lack of morality too, and that hardly means we shouldn’t try to use legislative means to reduce murder.
“Required, actually that’s not true – there are are number of papers that examine the effects of income inequality on factors such as crime, corruption, and community “disconnectedness” (for want of a better term). Virtually all of them show a measurable positive correlation.”
.
They must find some pretty bizarre places to do the research!
Do they find the the required income inequality all in one electorate?
I live in a dirt poor area of Australia and we have heaps of bashings and crime and disconnectedness – you know 10 cones for breakfast type of attitudes ( and I mean among the adults) , lots of illiterate children , kids with no food or shoes at school in winter but damned if I can find any rich people wafting about bothering anyone with their tasteless displays of conspicious consumption.
The point isn’t inequality of income it just plain old lack of income.
You are kidding yourself if you think the crime in my area is motivated by envy or complicated attitudinal responses to perceived difference.
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If the response to this explanation is that other areas have less crime, corruption etc, etc well so what ? It doesn’t account for the actual circumstances in poor areas, it notices that things are different elsewhere but that’s not an explanation.
murph, the link between low incomes and crime/corruption/etc. is certainly indisputable, but it can be fairly easily factored out of analysis of income inequality. The worst social dysfunction usually occurs where there is both: high levels of poverty along side excessive wealth, e.g. parts of Latin America – and not the poorest parts either.
Apologies, if this has all ready been mentioned:
A case for a new top tax rate paper.
wizofaus, do the analyses look at what happens when inequality increases/decreases in the same place? Or do they just take a snapshot? Also, how do they account for cultural factors that might impact on community dysfunction, like ethnic diversity?