When Paul Keating was prime minister, the top marginal tax rate kicked in at $50,000. Yes you read that right: in Australia, in 1996, every dollar earned over $50k was taxed at 47% plus the Medicare levy. In fact, the same was true in the year 2000. But today, only 3% of tax payers are in the top tax bracket, which kicks in at a whopping $180,000. Even when John Howard was prime minister, four times as many people were in the top bracket as are there today.
That is, while the rate seems high to some, relatively few pay it.
In fact, Australia’s top tax rate is not that high by international standards, despite the squawking of some who say that we will no longer be able to attract and hold high-flying talent with a tax rate as proposed by Bill Shorten. Australia’s top tax rate is the 16th highest in the Organisation for Economic Cooperation and Development (OECD), keeping it where it is, plus an additional 0.5% Medicare levy, is not going to result in a talent flight from Australia.
Many commentators get it wrong when it comes to assessing which factors attract high-income earners to stay and work in Australia. It’s our democracy, lifestyle and high-quality public services that make this country such an attractive place to live, work and invest. It is culture, not economics, that determines who wants to stay in a country. And, as Saul Eslake pointed out on the weekend, if you are earning that much, you are not necessarily doing it for the money. More likely, you are doing it because you like the work you are doing.
But revenue needs to come from somewhere and Australia has modest taxes on wealth compared to international standards. In fact, we have some of the lowest property taxes in the OECD. Unlike most countries, Australia no longer has estate taxes or death duties. Our capital gains tax is modest and distortionary. Large parts of housing wealth are not taxed at all with the exemption of the family home, regardless if it is a humble unit or a $20 million mansion. With so much wealth that is lightly taxed, it is left to the income rate to keep our system progressive.
Budget week 2017 has marked the last of the great economic ideological transformations going on, the final acceptance that Australia has a revenue problem. The quadrella is in: first the government accepted debt was no longer bad; then it was OK for the government to build and own things (owning a second Sydney airport, buying Snowy Hydro etc); then education and health spending were the go; now, the final retreat on revenue. As Paul Kelly said on Sky News yesterday, there is a new general agreement that budget repair needs to be done on the revenue side and the debate is now who pays.
And once we accept that we need to collect more revenue, it is difficult to argue that poorer Australians are the ones who should be slugged. But that would be the net result if the income tax system is not kept progressive. If the capital gains tax discount is not reduced; if estate taxes are not put in place; if family trusts get exempted, then it is income tax that needs to do the heavy lifting.
Of course, revenue could be raised through other forms: a carbon tax, a mining super profits tax or keeping company taxes where they are, but apparently that is not on the table for the right. Careful what you wish for, boys and girls.
And, overall, of course, as Adam Creighton said in The Australian on the weekend, as a society develops and its income increases, government spending as a share of the economy grows. Creighton points out that this is the story of the last 100 years worldwide. Put another way, it’s the price of civilisation. Indeed, as research is beginning to show, addressing inequality — most obviously via an increased role for government — is actually needed for growth and prosperity. It seems that Australian politics has caught up with reality. Now it is no longer a decision of if we should pay but how much should be paid and by whom. Welcome on board everyone.
*Ben Oquist is the executive director of The Australia Institute @BenOquist
Successive governments have over the past 50/60 years in Australia and probably always will unless there is an uprising, collect more revenue both in cash and services from lower income people than from the high earners. We are the easiest politically to rob of our standard of living and to have our income stagnate and not many people care including all political parties no matter what they say.
I don’t get the fuss being made about Shorten’s supposed tax ‘hike’ of 49.5% on high income earners, as surely they must be paying 49% now without the extra Medicare levy rise. Or are my maths wrong?
With the lapsing of the temporary 2% levy, it would be 47.5% with the additional 0.5% medicare levy, and a further 1.5% if you don’t have private health insurance (so 49%). If you went with Shorten’s proposal it would be 50.5% if you don’t have PHI.
As someone in the top bracket, I don’t mind per se, but it’s the effective tax rate of companies and other high income earners that grates. If we cut back on the plethora of deductions (or introduced a Buffet Tax), everyone could have a lower rate of tax.
The tax rates for individuals and companies have nearly no impact on decisions regarding where a company sets up and where an individual works.
These could be set much higher and the only difference would be increased government revenue and a higher pitch of whinging from very wealthy people. There is so much malarkey in the tax debate, based on underlying assumptions of ‘rational economics’ which somehow discounts society, law and order, services, infrastructure, culture and educated workforce as being outside the realms of consideration, where they are actually central. Tax is a tenth order issue in terms of where you work and which country you set up in.
After the years of deceit (under Abbott then Turbott) to get the truth – all that perfidious bullshit from the treasury benches of this government to get here?
This is really simplistic:
“And, overall, of course, as Adam Creighton said in The Australian on the weekend, as a society develops and its income increases, government spending as a share of the economy grows. Creighton points out that this is the story of the last 100 years worldwide. Put another way, it’s the price of civilisation.”
You can’t think of anything else that happened in the last 100 years that would result in more government spending? Incomes merely went up? It isn’t even wrong to suggest that the spending became necessary at a certain point of capitalist development, but to describe the great depression, both world wars, the end of the gold standard, the oil crisis and the cold war as incomes going up is just silly. For starters, what about the times where incomes fell instead of rose? What about times where they stagnate, such as right now? This is the most Tom Friedman thing you’ve ever written here.