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Let's Be (More) Progressive on Tax

Some argue that tax is too punitive in Australia, but given the widening rich-poor gap, perhaps its time to ask whether its in need of an update.
Last week the Institute of Public Affair's John Roskam pointed out that 3 percent of people who file tax returns account for 30 percent of all income tax --- it's actually a bit lower (27 percent) when we look at it as a proportion of all people who pay any tax because many people file a return with nothing to pay. Given such a heavy tax burden on so few people Roskam asked why people like Bernie Fraser would want to make our taxes even more progressive.

Well, let's get some perspective on why we have progressive taxation in the first place. The top 3 percent that Roskam referred to have an average salary of $300k. The other 97 percent of the population averages just $50k per year. If we didn't take the progressive approach, then to achieve the same revenue we'd all have to be taxed at 21 percent of income. That would give the top 3 percent an extra $51,000 in their pockets (a 27 percent increase), but reduce incomes of the lowest 16 percent by $3,102 to just $15,280.

So, what if we took the opposite approach and taxed the top 3 percent even more? Raising their average tax from 38 percent to 43 percent that would create an extra $4.2 billion in the tax pool. That's enough money to eradicate all income tax for anyone earning up to $33,000. Our richest 270,000 taxpayers would take an 8 percent cut in take home earnings, but 2.6 million people will see their incomes rise, on average, by 7 percent. The rich will spend slightly less inflating house prices and heading off on overseas holidays, the poorest 30 percent of workers will earn more, providing an incentive for others to move from the dole to paying jobs.

To me, what's alarming about the IPA's observation that 3 people out of 100 people pay 30 percent of all tax paid is not that those people are paying too much. That's just a consequence of an income distribution skewed so heavily to top-earners. What's alarming is that Australia, like most developed countries, has a widening rich poor gap. And if the market can't close that gap of its own accord, the government's tax policy has to step in.

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Read more By The Numbers articles by Phil Dobbie here.