A 50 per cent top rate makes sense

My column last week for The CEO Magazine reiterates a point made previously at Troppo: the weight of research shows decisively that high marginal tax rates have little effect on the efforts of most high-income earners.

Sample quote:

“These research results line up with what we all see each day. Does anyone really believe that if you slug all those Macquarie bankers 50% instead of 48, they’ll suddenly start arriving in the office at 8.55am and leaving at 5.25pm? Nope. They’ll still be streaming through the lobby at 7.15am tomorrow, coffees in hand, ready to work as hard as they did yesterday.”

This was Nick Gruen’s conclusion in his influential CEDA paper Tax Cuts for Growth, which in 2006 seems to have pretty much established that extra tax on high incomes would not devastate the Australian economy.

The paper also pointed out that given how much the rewards of the economy were shifting towards the top end of the income scale, increasing taxes there would raise a decent amount of dough.

If anything, the past decade has reinforced those conclusions. If you really think Australia needs to address its Budget deficit, then higher marginal tax rates for the biggest earners make a good deal of sense.

So now that Bill Shorten is suggesting exactly that, it’s worth revisiting what Nick had to say. It all still applies.

Read the whole thing.

David on Twitter: @shorewalker1

About David Walker

David Walker runs editorial consultancy Shorewalker DMS (shorewalker.net), editing and advising business and government on reports and other editorial content. David has previously edited Acuity magazine and the award-winning INTHEBLACK business magazine, been chief operating officer of online publisher WorkDay Media, held policy and communications roles at the Committee for Economic Development of Australia and the Business Council of Australia and run the website for online finance start-up eChoice. He has qualifications in law and corporate finance. He has written on economics, business and public policy from Melbourne, Adelaide and the Canberra Press Gallery.
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Tony Tea
Tony Tea
4 years ago

I agree that your tax numbers are dubious regarding incentive; I mean 48 to 50 is bugger all in the scheme of things. But what about, say, 32 to 53? And where do you draw the line regarding overall increases or decreases? Or, for that matter, what is a good/fair/effective/whatever line at which anyone should be taxed?

Moz of Yarramulla
Moz of Yarramulla
4 years ago
Reply to  David Walker

You could probably talk to both the sole parents who have taxable incomes more than $180k and ask them directly whether they’d change their work habits if tax rates changed. No need for statistical analysis :)

I think it’s also important to track gross income and make an attempt at untangling the more common tax avoidance measures (the lawful version, I think, cf evasion). Didn’t Kerry Packer famously have a taxable income of $1 every year?

From hanging around with the wrong crowd, I think it would also be handy to look at under-18’s and people in full time education, because there are a number of those who have taxable incomes just shy of the $90k surcharge level who could stand a bit of investigation (it seems a common pattern is to pay them that much as a way of increasing ‘family’ income from a family (part) owned or controlled company… but if the tax office decided that, say, them paying their after-tax money to their parents counted as rental income on the family home… things would be very exciting, tax-wise).

Anthony Park
Anthony Park
4 years ago

Hi David,

I want to point out that in academia other factors e.g. prestige or publishing a high impact paper drives long work hours.

Amongst my small business friends, they work super long hours, take home less than their top one or two employees. The hope is that at some point they get bought out by a bigger company.

However, quite a few of my higher salaried friends who work in finance etc get shares as part of their package. David, at what tax level do you think workers start taking more of their renumeration as shares, superannuation etc?

Moz of Yarramulla
Moz of Yarramulla
4 years ago
Reply to  David Walker

One consequence in software is a lowering of median income relative to average, especially in the US where that gap is already larger than most civilised countries. From personal experience there are a lot of people sucked into over-valuing options or unvested shares, as well as some who simply take a bad gamble because that’s the only option available. An unsurprisingly number of the big buyouts also involve the “sweat equity” partners getting very little because it turns out that the buy-out is timed for just before their shares vest or other similar tricks.

I think it does feed into the “entrepreneurial culture” that’s being imposed on us, because the jump from “I get paid whatever TaskRabbit leaves from the lowest bid” to “I might get more if these shares are ever worth anything” is small. But it’s also a handy way to eliminate minimum wage and other protections afforded to the upper end of the working class – here, have one single share, now you’re a shareholder and those rules don’t apply. The common alternative is the brutal Uber thing of “laws? Your laws mean nothing to us” which we’re also seeing more of. To the point where Deliveroo advertise as their novel selling point “we obey the law”.

hc
hc
4 years ago

This seems like a version of the fallacious argument that “all demands are price inelastic”. The evidence on labour supply elasticities that I have seen (e.g. the Treasury survey paper) is very mixed and inconclusive. The reason about being careful about high-income earners is that it matters a lot if income tax hikes reduce effort since, by definition, you lose a lot of output.

Mirrlees in his original paper on optimal income tax focused on such issues. Better to have higher average tax rates – including on low and middle-income earners – and low marginal tax rates on higher income earners. If you lose some low-income earners you don’t lose much output. They go on the dole and it does not cost much in terms of foregone output. It matters much more if high-income workers face disincentives since they fund the bulk of the redistributive transfers.

Mirrlees hated the politics of all this but that is where economic logic steered him.

conrad
conrad
4 years ago

The alternative to people working less because of high tax rates is that people will have to work more, both in the short term when they actually have the ability to influence how much they will work (e.g., to pay off loans etc.), and in the long term (to get enough to retire). I’m not lucky enough to be in the 180K+ bracket, but I’m not exactly poor, and if I had to pay more in tax I’d certainly be in the working longer in the long term category. When I see these elasticity of demand scenarios, these longer term changes are almost never talked about.

Paul Frijters
Paul Frijters
4 years ago

agreed that the economics makes sense, but that wont matter much politically. Taxation is foremost a political battlefield. Who is on your side?

I am and will always be Not Trampis
I am and will always be Not Trampis
4 years ago

David, Most high income earners have very good lawyers and accountants and thus will not pay 50%!
Not only that their advice is tax deductible!

john Walker
john Walker(@johnrwalker)
4 years ago

Is there really no way of improving-increasing the (taxable, non cross-subsidy) incomes, and numbers of, people in the middle?

john Walker
john Walker(@johnrwalker)
4 years ago

David
I guess there must be a point where a top tax rate would have an impact, would it be : 55%, 75% or what?

John r Walker
4 years ago
Reply to  David Walker

David thanks,
On the other side , I suppose that if some ( possibly quite a lot?)of those high earners for example a few uni CEOs and the like left the country ,we might be better off?

John r Walker
4 years ago
Reply to  John r Walker

“The remuneration paid by Macquarie Group to its 12-member executive team — more than $120m last year — is more than twice its expected $50m tax bill stemming from controversial new levy.”

Would we be worse off as a nation if some of those guys stopped working?

Moz of Yarramulla
Moz of Yarramulla
4 years ago
Reply to  John r Walker

Damn, mere moments ago I was looking at a “which entrepreneurs are valuable” article and now I can’t find it. The thesis was that there’s a fairly constant level of innovation in business over a whole society, the question is whether it’s directed to new products or new ways to game the system. Macquarie Bank are an excellent example of the latter, being extremely good at finding and making new opportunities for rent-seeking.

john Walker
john Walker(@johnrwalker)
4 years ago
Reply to  John r Walker

Dear Moz
This aging brain sympathises :-)