Tuesday, May 15, 2018

Morrison's peculiar tax cuts designed to hide the truth

As a boy I was interested in magic tricks, reading lots of books and learning to do a few. It taught me two terms that have proved invaluable to me as an economic journalist: “prestidigitation” and “sleight of hand”.

The trick is to draw the audience’s attention towards something else so they don’t notice you palming the coin or grabbing the rabbit you’ll supposedly produce from your top hat.

Politicians and their spin doctors are always trying to divert our attention from some embarrassing stuff-up, but it’s come to something when a treasurer produces a budget as tricksy as Scott Morrison’s effort last week.

His description of his three-step, seven-year tax cut, why it’s needed, and what it would achieve, were all calculated to mislead. Each part of his claim that it would bring about “lower, fairer and simpler” taxes is open to dispute.

The peculiar design of his cuts gives prominence to his immediate but modest cuts for “low and middle income earners”, while playing down the much more valuable cuts going later to the well-off (including a certain economic journo – in year seven I’m looking at a saving of $7225 a year).

If you’re out to bamboozle, it’s easy to do it with numbers. Income tax is complicated because it involves your income being taxed in slices, with the rate of tax on each slice getting progressively (note that word) higher.

At present, the tax rates start at zero for the first $18,000-odd of annual income, then 19 per cent for the next $19,000-odd, then 32.5 per cent for the next $50,000, 37 per cent for the next $93,000 and 45 per cent for everything over that total of $180,000.

Many people imagine the rate they pay on the last slice of their income (their “marginal” tax rate) is the rate they pay on all of it but, clearly, their overall average rate of tax will be much lower.

People on more than $200,000 would see no reduction in their marginal tax rate of 45 per cent. Their eventual saving of a flat $7225 a year comes from all the increases in the size of the slices that are taxed at lower rates than their marginal rate.

Morrison claims his plan is fair because lower income-earners would enjoy the biggest percentage reductions in their tax bill. People earning $30,000 a year would get an 8.3 per cent reduction in their tax over the seven years, he says, compared with a 2.5 per cent reduction for those on $200,000.

This is true, but it’s just playing with percentages. You’d hope the Treasurer was sufficiently numerate to understand that even a small reduction in a small amount will be a higher percentage than a much bigger reduction in a really big amount.

There was a time when the cover price of this august organ was raised from one penny to two. You could call that a 100 per cent increase but, even in those days, a penny wasn’t a lot of money.

What matters when comparing your tax cut with mine is not the percentage reduction in the tax we each pay, but the amount of each person’s tax saving compared with the amount of their income. As a tax economist would put it, what matters is the percentage-point change in someone's overall average rate of tax.

Turns out the average tax rate of someone on $30,000 would fall from 8 per cent to 7.3 per cent. They’d save an average of 0.7¢ for each dollar of income.

Someone on $200,000 would see their average tax rate fall from 33.6 per cent to 30 per cent, a saving of 3.6¢ for each dollar of income.

On incomes up to $100,000, the saving varies around 1¢ in the dollar, then rises steeply up to the peak of 3.6¢ at $200,000. That’s fair?

But Morrison is happy to justify the much better deal he wants to give very high income-earners. He repeats a favourite complaint of the rich, that the 3 or 4 per cent of all taxpayers on the top marginal tax rate pay 30 per cent of all the income tax raised.

This is classic fiscal sleight of hand. For a start, it ignores that the tiny band of tax martyrs also earn a huge share of the total income. More than 18 per cent. But that’s just their taxable income, after they’ve done all they can to minimise it.

The economist Saul Eslake reminds us that the martyrs account for more than 22 per cent of all taxpayers claiming net rental losses on negatively geared properties, and for more than 13 per cent of total losses. They account for 64 per cent of the annual value of realised capital gains, only half of which is taxable.

Another part of the illusion is that the rich whingers want us to forget that personal income tax is just the biggest and most visible of our taxes. It accounts for only half of all the federal tax we pay, and when you add in state taxes its share falls to 40 per cent.

Most of those other taxes, particularly the GST and sin taxes, are “regressive” – the poor lose a higher proportion of their income than the rich. Take account of the other 60 per cent of tax collections and our top earners aren’t as badly treated as ScoMo wants us to believe.