Thursday, September 20, 2007

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...

3 Comments:

Blogger timboy said...

Simply because it's too complicated for most of the Canberra Press Galery to get there head around.

This is where I pick up on the difference between Megalogenis and Matt Price.

Price recycles rumour, guff, inuendo and scuttlebutt and calls it punditry.

Megalogenis actually gets his hands dirty, and gets into the policy detail.

One of the only journos to actually do that at the moment.

8:14 PM  
Anonymous Anonymous said...

Almost as incoherent as.....

Mike Willesee: "If I buy a birthday cake from a cake shop and GST is in place do I pay more or less for that birthday cake?"

John Hewson: "...well, it will depend whether cakes today in that shop are subject to sales tax...or they're not...firstly. And they may have a sales tax on them...Let's assume that they don't have a sales tax on them...then that birthday cake is going to be sales tax free. And of course it would be exempt...uh, the - then - of course - you wouldn't pay...uh..it would be exempt...the - then...there would be no GST on it under our system. One with a sales tax on it today would attract a GST and...um...then the difference would be the difference between the two taxes whatever the...ahh...sales tax rate is on birthday cakes, how it's decorated, because there will be sales tax perhaps on some of the decorations as well and of course the price....the price will reflect that accordingly."

Willesee: "Just on the birthday cake, because I'm trying to pick up a simple example - you tell us in what you've published that the cost of cake goes down, the cost of confectionery goes up, there's icing and maybe ice-cream, and then there is candles on top."

Hewson: "Yes...yes...that's the difficulty - that's what I'm trying to address in the question. I need details on the cake to give an accurate answer. I mean if it's just a cake from a cake shop - that's not presently under sales tax - it will not attract the GST. If it is from a cake shop that falls under sales tax, with the candles, decorations as you say, then it will attract the - after scrapping the sales tax."

Willesee: "...okay...it's just an example...If the answer to a birthday cake is so complex - you do have an overall problem with the GST, don't you?"

Hewson: "Well, people don't know how much tax they currently pay..."

10:45 PM  
Anonymous EconoMan said...

I disagree anonymous. It's not incoherent, just wrong.

And timboy is right. It didn't get any play because it's complex and the press are too stupid, let alone the 'soundbite' audience

11:10 PM  

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