Always Travelling

Call me weird, but I've been thinking a lot about public governance lately. Call me even weirder, but I'm writing this at 1.00am and the only reason I am up is because I just took a few headache tablets (this is the worst headache I've had in a loooong time). I'm going to write about tax, and hopefully my international friends will find this interesting. Perhaps you can make some comparisons between the Aussie system and your own?

Tax reform has been pretty significantly achieved over the past two decades in Australia, but there is still a way to go. Australia has a progressive income taxation system, where the money you earn is taxed at different rates, as shown in the tables below. The whole basis is that higher income earners are more able to make a higher proportional contribution to public goods. Australia has other usage based taxes and flat taxes, for instance funding for road construction and maintenance comes from petrol excise which is obviously usage based, but income tax is by far the most significant and impacting, and I happy to live in a country with a tax system based on redistributing wealth to aid low income earners. However, much more can be done. Take a look at the income tax schedules for Australian residents in 1985-86, 1994-95 through to 1999-2000 (tax rates were kept the same through this period), and 2006-2007. You can see here for full history.

Note the difference between marginal and average tax rates. So in 2006-2007 if your taxable income is $25,000 your average tax rate would be around 11% (2,850 from 25,000), if $75,000 your average tax rate would be around 24% (17,850 from 75,000), and at $150,000 your average tax rate is around 32% (47,850 from 150,000).

It's important to note that if your wage is $100,000 it does not necessarily mean that your taxable income is $100,000 - you can significantly decrease your taxable income by claiming deductions for many different things. Two of the most significant are voluntary before-tax superannuation contributions (starting July 1st most people can put up to $50,000 into super and thus reduce their taxable income by that amount), and claiming expenses on investments (called 'negative gearing', and typically people claim the difference between mortage repayments and rental income on investment properties, this amounted to something like $20 billion last year). Superannuation is one of the best things the Australian government has introduced - the aim is to phase out retirement pensions or at least significantly decrease the load on the taxpayer. At the end of June 2007 it is estimated that this pool of savings will total $1.2 trillion and be the second largest pool of investment funds in the world, behind Japan Post bonds. The new legislation I mentioned above that will allow most people to put away up to $50,000 per year into super (at 15% tax on entry) and thus decrease their taxable income by the same amount will have a massive impact on superannuation, and I believe will sharply increase savings levels.

We're in a very good position going forward: Australia has no significant public debt, and the government has delivered 10+ straight budget surpluses, despite quite large income tax cuts. There is so much to say right here, but the most important points are these:

• The engine of our tax system and thus the funding of public goods and services is our high earners. The average wage in Australia is around $50,000-$60,000, and 90% of people pay less than $15,000 tax. High earners however contribute far more, for instance a taxable income of $250,000 results in over $90,000 tax. Tens of thousands of Australians have very high incomes and there is only so much you can do to reduce your tax burden.
• However, high income earners should have a much greater responsibility to contribute to the community and thus this burden is fair enough.
• Tax reform is all well and good, and an important goal to be achieved to keep the economy kicking, but standard of living is also affected by the ready provision of public goods and services. Some things should not be privatised or scaled back because of a desire to reduce taxes. Education and health cover in Australia have moved backwards in recent times. Liberalisation has done wonders for the Aussie economy, but the benefits of this (and the overflowing government coffers) should have been sown into better education services and health cover.

posted by Nic  # 3:07 AM