Are the Rich undertaxed?

There’s been a lot of Robin Hood politics of late, with talk of punishing “the rich” and giving more to low income earners. I’m certainly no fan of middle-class welfare, but should higher income earners be paying a higher percentage? The following stats come from this ATO document (excel file) which show the percentage of income tax paid by percentile:

Percentile % Income earned % tax paid
Top 1 9.4 16.5
Top 5 20.8 32.3
Top 10 30.3 43.6
Top 25 51 65.1
Top 50 75.1 86.3


29 thoughts on “Are the Rich undertaxed?

  1. fleeced

    of course the lowest earners should pay the lowest percentage of tax. this is also LDP policy and is correct. what’s to debate?

  2. to be clear – the reason is the existence of a tax-free threshold for the first proprtion of earnings ($30k sounds about right).

  3. Pommy, my point was aimed more at those insisting that rich should pay even more. I think having the top 10% pay 43.6% of taxes is probably excessive. Whenever a tax cut is offered at the higher levels, you always hear cries of, “why are you giving money to the rich?!”

    In fact, in “net terms” (ie, taking into account welfare, bonuses, etc), the top 10% would pay well over half. Be interesting to calculate by how much.

    Now that you mention LDP policy though, it would be interesting to calculate what the percentiles would look like under the 30/30 tax system…

  4. Co-Monarchists don’t support any taxes (one’s home should be one’s castle, and all that), but a good step on the zero-tax path would be equal taxation across the board. (And I have sometimes jockingly thought of a poverty tax- take a higher percentage of the pay of the bottom ten-percent, as an incentive to get rich!)

  5. Hmmm… I tried doing some back of the envelope calculations on 30/30 revenues based on that spreadsheet… but think I screwed it up – looks too wrong – so I’ll leave it as an exercise for someone else 🙂

  6. Ah, what the hell – here are my back of the envelope figures for 30/30 (2005/06 figures):

    No. of taxpayers: 9,408,255
    No. of taxpayers earning > 30k: 6,021,200
    No. in top 10%: 940,805
    Total Income: $467,914m
    Top 10%’s income: $141,491m

    Total Tax take under 30/30:

    ($467,914m x 0.3) – ($9,000 * 6,021,200)
    140374.2m – 54190.8m
    = approx $86.2 billion

    Hmmm… did I do that right?

    Top 10% tax contribution under 30/30:

    ($141,491m * 0.3) – ($9,000 * 940,805)
    42447.3m – 8467.3m
    = approx $34b

    34/86.2 = 39.4%

    Hmmm… If I’ve screwed something up, or missed something out, be gentle 🙂

  7. The reality is that just about everyone who participates in society is somehow ‘taxed’ even though they may not pay taxes outright. When a customer visits a shop, a portion of the money spent there will go to the owner/management/employees of the shop who might have to pay income taxes. Cut out the middle man and we see that the customer is in fact paying the very income tax that people think the rich pay. Figure the items purchased were produced, a portion of the price pays for production which includes labor/management/owners who also have to pay taxes, these taxes are then passed on. So now a customer pays taxes on the retail workers income taxes, pays taxes on the producers income taxes, and might pay an income tax on their own income. The point I am trying to get at is that all these taxes find themselves shifted and passed on to nearly everyone. A tax on the rich will end up costing working class people down the road. While politicians want to throw out electable phrases like cutting taxes on working class they are not addressing the root problem and that is total taxes collected. Everyone wants to have a tax system which requires they pay nothing and that

    If the government only taxed 1% of the GDP it doesn’t matter who would pay for it. If everyone had to pay a 1% income tax I doubt there would be very many people who would complain over a large tax burden. Or hell charge the top 50% a 2% income tax and make everyone happy. The taxes that are passed on to consumers would now disappear and companies would now be able to have lower prices and workers would be able to get more stuff per hour of labor (both in having more money due to no income tax and having lower prices on the market place)

    In Australia the government consumes roughly 35.2% of the GDP and in the United States the government roughly consumes 36.6% of the GDP. (Heretege Index of Economic freedom) thus the Aus government only costs 96% of the American one per capita. A slight advantage. It doesn’t matter who pays it in the form of direct income taxes because these costs are shifted to just about everyone. However, Hong Kong pays 12.7% of their GDP and Sweden pays 56.6% of theirs (that is actually down from 60%)..

    When politicians get up on their soap box and tell everyone that they will lower their taxes and shift them to the rich yet at the same time increase the total burden of the GDP goes up and thus ends up costing everyone it may win them alot of support. And it may solve the problem of them getting elected. But it will not address the root issue of big government spending.

    Considerably lower the spending as per GDP and everyone will benefit by having less taxes and lower prices and by attracting foreign entrepreneurs/workers to move and invest in Australia.

  8. I really like a proposal of mine to switch our entire tax system to a flat 20% GST (VAT for international visitors) and no other taxes.

    Considerations can be made for welfare issues, such as rate adjustments and tapered means testing and HECS or voucher style medicare and education syste, discussed before here so that no one is worse off in real terms. Such reforms would have efficiency gains as well.

    This is the second most efficient tax and would replace so many other less efficient, inequitable and resource wasting taxes. The 17.5% tax on clothes (tariffs). The 41.91 cpl excise fuel tax. The 47.5% income tax. The 5 – 6% tax on employing staff. The 3.5% tax on the purchase of a home.

    One requirement:

    We end the duplication of Federal and State services to fund the savings in revenue losses (and maybe cut some pork like the baby bonus).

    There is a second requirement that we lose some Federality – but this has been largely lost and I would split the tax up equally between Commonwealth, State and Local Governments, at each level on a per capita basis. Duplication and Government roles? Let the cash decide who can afford what.

    The beauty is that a libertarian angle can be thrown in, that the tax/GDP ratio never increases and the budget must always be balanced within a small margin of error each year(balanced over the cycle).

    Therefore, the tax rate can be dropped as growth continues, perhaps right down to 10% fairly soon or indeed 5% in the far off future.

  9. I’m surprised nobody has mentioned the adjustments to medicare rebates.
    It’s a move towards more socialised medical care.

  10. Mark, on the surface of it, I would definitely support a proposal similar to 20% GST on everything.

  11. Yeah Tim, it is part of their ideological push for unversal/socialised healthcare… but the whole rebate thing was wrong from the start. The whole price regulation of the health funds is pretty bad as well – but necessary with the way the rebates are structured.

    I’d like to see the medicare levy increased to reflect it’s actual cost – but then income tax reduced accordingly (ie, revenue neutral). Once people realise what it costs, they might change their opinion on the topic (though sadly, most “costs” of socialised healthcare are not merely financial).

  12. To replace income taxes and other taxes without cuts in spending would need a GST closer to to 50% wouldn;t it? (which means 1/3 of the cost at retail would be going to tax). Obviously, we’d advocate significant cuts to spending to bring that down conserably – but 20% seems pretty ambitious.

  13. err no, putting on some arbitrary surcharge on supposedly high income earners to socially engineer people into taking out private health insurance isn’t ‘market based’. either restrict medicare to the very poor and cut taxes or else make medicare more cost reflective.

  14. Mark

    A 20% GST with no income tax is politically impossible under a ‘one man one vote’ democracy. No point in even discussing it.

  15. 1. Removing all other taxes removes deadweight loss of the worst taxes and taxes total production. It is in effect a 16% income tax on a efficiency increased national GDP.

    2. You reckon pommy? – The support the GST got was because people thought other taxes would go – I think your pessimissm is unfounded. The anger over the GST is largely that other taxes didn’t go.

    Hewson won a higher popular vote in 1993, with a much more radical GST than Howard’s.

  16. I don’t think a 20% GST would be radical for a major party to suggest, but somehow when a major party does it, it’s never as radical as when a minor party suggests it.

    Fleeced has a valid point however, Mark. Unless you can find HUGE areas of government to cut the GST would be closer to 50%. How would a 50% GST compare to the current system?

  17. Points taken Jason and Fleeced.
    It’s so frustrating seeing mainstream governments tinker around the edges with tax systems without treating the source of the problems.

    In regards to medicare reform, perhaps Australia needs a group such as this (American’s for Free Choice in Medicine).

  18. I did my figures very, very roughly – but I think my claim is still valid – remove the duplication of services and eliminate the deadweight loss of taxation from the worst taxes and the 20% GST only option ends up being financial if only small cuts are made to bad ideas like middle class welfare etc.

    If a shortfall leads to a reform of welfare (etc) than can eliminate poverty traps (etc) and make recipients better off, I fail to see any flaw.


    You would still be better off. That’s how bad the tax system is now.

  19. What, even bludging Uni students on Centrelink would be better off? I don’t pay income tax, so there better be a rabbit in your hat there if you are making my groceries cost 10% more 😉

    Of course I’m less interested in my own current finances than a more efficient tax system. I like the idea of a consumption tax- it is more ethical, but it has to be costed and it has to be salable. The other problem is leakage- a sales tax would have to apply to all imported goods (something the GST doesn’t now- like if I buy stuff on ebay). But there’s still the potential for a black market to evade GST if it makes up a larger part of the cost of goods.

  20. I mentioned above welfare should be adjusted accordingly.

    If you assume 28.2 % of GDP, the tax needs to be set roughly at 39.2% to run a balanced budget.

    This assumes no efficiency gains, no elimination of duplication and no libertarian reforms if there is a shortfall.

    You would be better off. Your clothes would be at least 17.5% cheaper. Your new car when you graduate would be close to 30% cheaper. It goes on.

    Basically the GST would be the direct resource cost excluding a much smaller proportion of deadweight losses. So it is efficient like a head tax but far more equitable and feasible.

    The real sad thing about this is tax reform just isn’t taken seriously. We know the deadweight losses are high, the rates are high and taxes inefficient. What is even more alarming is that little comment is made to the fact that we tax nearly every stage of production directly and indirectly with a myriad of direct and indirect taxes which change incentives and lead to a loss of productive output.

    Think of something simple like a carton of milk. How much did each input get taxed to give you a maybe $2.50 1 ltr carton of milk?

    How much would it cost with a simple high and low GST with different deadweight loss scenarios?

    Of course, what ever the starting rate (I suggest 20%) the idea is to incrementally lower it – libertarianism by stealth.

  21. I think it definitely warrants discussion. I don’t know enough about economics to say whether a GST or a flat tax with a high tax-free threshold would be better. But I think they are both much better than the current system.

    I also think in terms of taxation the powers should be returned to the states so we can see competitive federalism at work.

    I would be happy to try replacing income tax with GST as policy for the LDP. I know even “average Joes” can agree with the idea of taxing what you buy instead of what you earn. It encourages saving instead of spending.

  22. The 50% figure I quoted was for the current tax revenues of course (and assuming the first 10% was still locked up with the states)… I actually agree with Mark that GST is better in many ways – and we could easily bring the level down.

    Another way of selling GST as opposed to income tax is it’s effect on trade, since imports and local-produced are taxed evenly… we always talk up free trade (as we should), but locally produced stuff carries a huge tax burden. On that score, you might even be able to win over some of the protectionists.

  23. Shem – the next time you are at uni, pick up a good book by Joeseph Stuglitz (yes, before he went native) called Economics of the Public Sector: Third Edition, W.W. Norton & Company, February 2000. It has some minor flaws such as the discussion of some mythycal market failures, but the tax analysis is simple to understand but analytically very good and deep.

    A GST and a basic income are analogous to a negative income tax, but for the efficiency advantages.

    I think if we can look at this and the Medicare as HECS/vouchers, school vouchers and disabled care issues, libertarianism has a good chance of getting a lot more support at the next election.

    That said, the cumulative and mutlisectoral impacts of taxation on the final price of any good is simply crippling to our economy. This has causes real suffering for real people, if any sceptics will quip “just theory” or “just data”.

  24. Here in America there are small government groups proposing something known as the fair tax. It is a federal sales tax that would replace the federal income tax (and I believe the inheritance as well). I think they put it at somewhere around 28% or so. One of the stipulations it has is that it would provide a welfare benefit to everyone and cut a check to all Americans each year to cover the tax increase on food/clothing for struggling families. As currently written though the fair tax does not address the size of government and does not plan to totally abolish the income tax just shifting income tax liability around. So at some point in the future we may have a 23% sales tax and a 25% income tax. Like I have mentioned before, at our current size of government it does not matter how he money is collected. 35-40% of the GDP going to the government is going to look pretty ugly no matter how you collect it.

  25. No need to call for an increase in the GST. Just abolish income taxes and decentralise the rest of the taxing/spending decisions to lower levels of government. A limited federal govt could get by on about $30b, which comes from “other” and “excises”.

    Then the states can compete on their tax/spending mix. Victoria can introduce a 30% GST and a state-based progressive income tax… and use the funds to support a fabulous health system and high pension. Qld can do the oppose (insh’allah). Different jurisdictions can try different mixes. Ah — the joys of competition.

    Federalism is a great answer to a lot of political questions.

  26. I agree that we should be aiming to abolish income tax without increasing GST. All they have to do is hold real per capita government spending steady for a decade and economic growth will elliminate the need for most of the income tax.

    I disagree with Pommy when he says abolishing the income tax is politically impossible. It is merely very difficult. We got rid of inheritance tax and nobody speaks of it much these days.

    Riley highlights a very important point which is the question of who really pays the higher income tax applied to high income earners. Putting extra tax on rare resources like doctors, professionals and managers makes little sense. Would anybody suggest putting a higher GST on essential services such as health care?

  27. “Different jurisdictions can try different mixes. Ah — the joys of competition.”

    Regional monopolies aren’t real competition though, are they? They’re better than one centralised monopoly, but still…

  28. Home business owners all across the globe are quietly making yearly six-figure incomes. Several of them make six-figures by helping aspiring entrepreneurs start their path to their very own six-figures. What a gorgeous idea!

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