Tax’n’spend

Well, it’s no surprise that the government is a little low on money.  Most media reports keep propagating the Rudd spin that this is all caused by the global economic crisis and “decreased revenues” – but they seem to ignore the $100b+ additional spending.  And spending is yet to increase further, with heavy borrowing and taxing to pay for it all.  The latest round:

THE nation’s big earners, on $150,000 a year or more, will be hit to pay for pension reform.

Yes, we’re back to class warfare…  Sure, we’re increasing taxes – but only on rich people, and it’s to pay for pensioners – so that’s ok.  Hopefully, we won’t go as far as the UK – who are increasing their top rate from 40% to 50% – but we have in common with the UK the absolute refusal of government to cut spending:

“Either you completely slash and burn everything government does and throw tens of thousands of extra people on to the unemployment queues and cut funding for hospitals and schools, or you engage in temporary borrowing,” he [Rudd] said.

Of course, he doesn’t necessarily need to cut funding to hospitals and schools (which are rightfully state responsibilities anyway), as there are many other areas with lots of fat.  Indeed, throwing tens of thousands of public servants on to the unemployment queues would be a net gain – though since most of these vote Labor, I doubt that will ever happen.

We’ll wait and see.  I’d like to think that they’re just trying to soften us up for a budget that won’t be all that bad, but I’m sure that’s just wishful thinking.

Devil in the Details

One of the many problems with a complex tax system of varying tiers, qualifications, handouts, exemptions, claimed dependancies and the like, is that it becomes increasingly bureaucratic by necessity.

We’re giving a handout… wait – what if they’re in prison, or overseas, or die before the cheque arrives?  We have a baby bonus… wait – what about adoptions – do adoptive parents get anything?  OK, so they do… what if someone puts their kid up for adoption the week after getting their bonus – do they have to give their bonus back, and do the new parents still get a bonus?

Supposing you want a consumption tax, but don’t want to tax food… wait, what about junk food?  OK, so we’ll only tax junk food… wait, are we going to have to legislate a receipe for bread?  When does it become cake?  It starts out innocent enough, but before you know it, you’re legislating the allowed shape of bananas and cucumbers.

These all might seem like rather silly examples, but they’re a symptom of an overly complex tax and welfare system.  In case you think they’re not considered, here’s an excerpt from the IRS website (the US version of the ATO):

Topic 357 – Tax Information for Parents of Kidnapped Children

You may claim a kidnapped child as your dependent if the following requirements are met:

  1. The child must be presumed by law enforcement to have been kidnapped by someone who is not a member of your family or a member of the child’s family, and
  2. The child had, for the taxable year in which the kidnapping occurred, the same principal place of abode as the taxpayer for more than one-half of the portion of such year before the date of kidnapping.

If both of these requirements are met, the child may meet the requirements for purposes of determining:

  • The dependency exemption
  • The child tax credit, and
  • Head of household or qualifying widow(er) with dependent child filing status.

This tax treatment will cease to apply as of your first tax year beginning after the calendar year in which either there is a determination that the child is dead or the child would have reached age 18, whichever occurs first.

How twisted is that?

Of course, a 30/30 tax system doesn’t seem to have these problems, as there is a flat effective marginal rate of taxation, and no deductions.

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

Thoughts?