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Lies, damned lies and tax cuts statistics

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Prime Minister Scott Morrison continues to spruik $158 miilion tax cuts package (Screenshot via YouTube)

Former Head of Finance Michael Keating debunks an SMH article that suggests the Morrison Government’s $158 billion tax plan must be passed in full to benefit workers.

LAST SATURDAY (22 June) the Sydney Morning Herald (SMH) published an article, 'Coalition tax plan would give Australian workers an edge', which purported to show that

'Middle and high-income earners will face some of the highest tax rates in the English-speaking developed world unless the Morrison Government’s $158 billion tax plan is passed in full when the Parliament returns next month.'

Unfortunately, I consider this article to be so misleading that it reminds me of the Mark Twain quote“There are lies, damned lies and statistics.”  

The crux of the article is encapsulated in the two columns showing income tax paid in the table below. I assume the SMH calculations are correct and that, as shown, Australian taxpayers are presently paying a bit more than their counterparts in the other developed English speaking countries if their taxable income is $250,000 per annum, and a little more than in the other countries except New Zealand if their taxable income is $100,000 per annum.

International tax comparisons

 

Income tax on
$100,000 pa
Income tax on
$250,000 pa
Total tax revenue
as share of GDP % 2017
Australia current law

$24,632

$85,732

35.1

Australia by 2024-25

$21,592

$74,092

NA

New Zealand

$24,883

$74,382

41.5

U.S. (California)

$21,106

$68,823

33.8

United Kingdom

$17,038

$77,146

39.0

Canada (Ontario)

$23,494

$85,587

39.2

Source: Income tax paid is reproduced from the SMH article, and the tax share of GDP is from the OECD Economic Outlook 2018 

My reasons, however, for considering this comparison misleading are as follows.

First, according to the latest ATO data, less than 20% of taxpayers have taxable incomes as high as $80,000 per annum or more, and a tiny 3% have incomes as high as $180,000 per annum. This means that anybody with a taxable income of $100,000 per annum or more would be in the top quintile of taxpayers and, on any normal definition, they would not be described as middle-income earners. In other words, this particular international comparison of income tax rates is only relevant for a small minority of high-income taxpayers and tells us nothing about relative rates of income tax for most taxpayers.

Second, income tax is of course not the only form of taxation and a more valid international comparison would have considered all forms of taxation and the overall “burden” of taxation. As shown in the other column in the table above. In fact, according to the latest OECD data, total tax revenue as a share of GDP is lower in Australia than in the other English-speaking countries, except for the USA. Furthermore, the only reason why the U.S. has a lower ratio of taxation to GDP than Australia is that its government borrows more and its ratio of public expenditure to GDP is actually higher than in Australia.

Thus, the simple truth is that there is no pressing need to support the Morrison Government’s proposed tax cuts just to maintain a competitive tax structure. High-income people might pay a bit more income tax here, but most Australians pay less in other forms of taxation than their overseas counterparts. Furthermore, there is no evidence that our most talented people are all about to migrate just to enjoy a lower tax rate.

Indeed, location decisions are also influenced by what governments do with their tax revenues and the quality of services that they buy. Thus, even within America, we find that Americans have been migrating from the South to the North for many years, despite higher taxation in the North — taxation that, for example, pays for much better quality education opportunities in the North, which leads to much better job opportunities, as well.

Instead, a key reason for supporting the first round of tax cuts, which are aimed at lower and middle-income earners, is the need for a fiscal stimulus — a need that the Morrison Government totally denied only a month ago before the May Election when they boasted about their “strong economic management”. However, the subsequent two tranches of tax cuts, which the Government is insisting on passing now, will only take effect in 2022-23 and 2024-25. That is far too late to help restore demand in the next three years, even if they were of more help to middle-income earners.

In my view, Labor was right to oppose the second and third tranches of the Government’s overall tax-reduction package in the last election. As I showed in an earlier article, 'Why Labor should oppose Morrison’s tax cuts(Pearls and Irritations, 30 May 2019there are serious doubts about whether these later tranches of tax reductions can be afforded in the long run.

However, if there is a need for compromise, the best alternative would be to bring forward the second tranche and combine it with the first tranche. This second tranche is less focused on the top 1% of taxpayers, while the increase in incomes and demand is needed now. But there is no case for the third tranche which accounts for $95 billion of the total $158 billion cost of the whole package and where most of the benefits from this third tranche flow to the top quintile of income earners, and especially the top 2% — that is the top of the town or whatever else you want to call them.

Michael Keating is a former Head of the Departments of Prime Minister and Cabinet, Finance, and Employment and Industrial Relations. He is presently a Visiting Fellow at the Australian National University. This article was published on 'Pearls and Irritations' under the title and is republished with permission.

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