Peter Costello Actually Said This!

Greg Turnbull: Treasurer, Greg Turnbull from the Ten Network. It is easy to see what would have appealed to you about the numbers you have arrived at in the tax reforms that you announced last night, there is the rates at 15, 30, 40 and 45 and the thresholds at roughly 25, 75 and 150, they are a symmetrical, even beautiful, set of numbers. But, I wonder if in what you have picked up in symmetry you have lost in progressivity and equity and my question to you is this: given that I think you must accept that someone on $74,000 a year's income has a higher living standard than say someone on $26,000 a year income, why should they have the same marginal tax rate?

Peter Costello: Well, they do have the same marginal tax rate, but bear in mind, even though it is the same rate they pay different amounts of tax. The person on 30 cents of $24,000 pays is it, correct me if I am wrong here, three times 2.4? 7.2? $7,200? The person on $74,000 pays 74 times 0.3 which is roughly, maybe 20. So, even though they are on the same rate they are paying vastly different amounts of tax, same rate but different income yields different amounts of tax. Thirty per cent of $24,000 compared to 30 per cent of $74,000. Now on your other point, it is true that reducing the top tax rate does reduce the progressivity to some extent. That is true. But if you wanted a more progressive system and if you think it is a weakness to have somebody on $24,000 paying 30 cents and somebody on $74,000 paying 30 cents, you would really favour a tax system that had a 30 per cent rate at $24,000 and 31 at $25,000 and a 32 at $26,000 and whatever it is. You would favour multiple rates moving at small thresholds. That is what you would favour. And what is the downside of that? Well, you may say equity, but the downside of that is every time there is pay raise you would have massive bracket creep as people move into different rates. And so the general thinking in tax policy, and it has certainly been my thinking, is that we should have fewer rates and that they should be lower, rather than multiple rates and that they should vary. And that has been the direction of the Australian taxation system probably from the ‘50s and the ‘60s.

See the transcript:

http://www.treasurer.gov.au/tsr/content/transcripts/2006/069.asp

For those of you that didn't pick it up, Peter's arithmetic example of the tax system is completely incorrect. It's an error noone with the slightest mathematical competence who has ever filled out a tax return would make. So I don't labour the point, ask in the comments if you didn't pick it up.

So Rudd got the top tax rate wrong. Big deal. At least he might understand what a marginal tax rate is. Unlike the Treasurer. Why do the media attack Rudd over slipping a tiny bit, yet not the Treasurer over fundamentally misunderstanding our taxation system? Must be the left wing bias...