ReadWrite-grogsgamut

So the big splash for the Libs in the friendly Sunday papers was all about babies. Well no, but that was the way it was spun. It was actually about Abbott’s 3 year old paid parental leave scheme. You have to love that a policy first announced in early 2010 is still able to badged up as an exclusive that deserves a front page massage.

I wish I had kept a copy of every front page story this policy has been given over the years. I’d say a minimum of four at least.

Oh well. Let’s be generous and say at least it is a policy.

Now firstly I written quite a bit about this policy – here, and here. Most recently on my Guardian blog.

So I’ll try not to repeat myself (Oh bugger it you know I will). And let’s see if we can focus on the positives.

I guess given they have had the thing hanging in the Liberal Party closet for so long now, I’m sure this time we have got all the costings to go with it? You know just to make sure that they have crossed all the i’s and dotted all the t’s.

And best of all we know we are going to see the costings because as Joe Hockey said on the weekend:

JOURNALIST: Are you still going to wait until that last week to release the costings to the public?

JOE HOCKEY: What we have said is - you don’t release policy costings before you release the policies.

So given this policy is now announced, we’re going to get to see it all!

Hmm. Well that seems to be a no.

Look I know I am being a right pest about these costing. I should just trust Joe Hockey. After he also said this on the weekend:

JOE HOCKEY: Well we've been releasing the costings on individual policies along the way. And therefore you don't release, you don't release policies and costings before the appropriate time during the election.

I mean can I, can I say this Lyndal? Labor did not at the last election nor at this election has it released all of its costings. At the last election…

LYNDAL CURTIS: But don't you want to be better than Labor?

JOE HOCKEY: We are. And we are. That's exactly what we're doing. We have released the most comprehensive analysis of a political party's costings and policies ever. Ever.

Oh wait, sorry that was what he said back in 2010. You know back when their costings ended up being out by around $11 billion dollars.

My mistake.

Here’s what Hockey said on the weekend (when he announced that he had picked three people – Peter Shergold, Ian Scanlon and Geoff Carmody to “sign off” on his costings):

JOE HOCKEY: No, no, not at all. Not at all, not one second. Every number the government has produced for the last six years has been wrong, and having an independent verification process as well as using the Parliamentary Budget Office means that no Opposition has ever put more effort into ensuring that the numbers are correct.

Yeah. Show me them, and then we’ll talk. Till then you’re just an empty suit.

But we should be glad that at least their PPL policy document does give us a bit of detail.

In fact it gives us just enough detail to realise that the long said line that the PPL scheme will be covered by a “modest increase” in the company tax is a fib.

Right at the end under “Costings” we find: “The cost will be fully met by associated reductions in other outlays”.

I guess these associated reduction are a bit like “on road costs”: the salesperson doesn’t want to include them in the price of the car, or actually mention them, but you sure as heck will end up paying for them…

One of the other ways in which the cost of the policy is covered is from the state governments paying money to the Federal Government in the case of the state employee choosing to take the federal scheme rather than the state scheme. On this aspect the journalists at this morning’s press conference were pretty good:

QUESTION: Mr Abbott, just on paid parental leave, Mr Abbott, one of the savings measures that you’re counting is preventing state public service workers from double dipping, that of course has been costed by the PBO you say. What’s the value of that saving? You must be able to put a dollar figure on it? I mean how is it real? Don’t you need an agreement with the states to do that? Aren’t you just announcing something now and trying to finalise it later?

Excellent question, goes to the heart of it all. The Australian's David Crowe and Patricia Karvelas report that if the states don’t come to the party the costs could be short rather a sizeable sum.

So let’s see how Abbott goes giving us a “fair dinkum” response for his “fair dinkum” policy. 

TONY ABBOTT: Look, there are many things which are obviously subject to agreement, but sensible adult governments are normally able to get agreement and obviously the state premiers understand that if we are relieving them of some hundreds of millions of dollars of obligations that they’ve got, there ought to be a fair trade-off. The state premiers understand that and we’ve got some 18 months or so between an election should we win and the beginning of the policy and that is more than enough time for sensible adult governments to sit down and negotiate what are sensible win-win arrangements.

Tony Abbott might want to ask Julia Gillard how it went dealing with “sensible adult governments” to get health deals and schools funding deals done.

There was also a good question about the impact of franking credits on the amount of tax raised by the 1.5% tax increase to pay for part of the scheme.

And then one question that went right to the centre of the policy failure that is the Liberal Party’s scheme. 

It is supposed to improve productivity and participation. So one journalists asked Abbott to explain that:

QUESTION: Chris Richardson has said that your policy is unsustainable, the paid parental leave scheme policy, can you quantify how it will boost productivity?

TONY ABBOTT: Well, it is absolutely sustainable because it’s fully costed and fully funded. Our policy is the same broad policy as exits in most of the OECD countries right around the world, now why is it that it is sustainable there and  unsustainable here? I would respectively suggest to the learned economist in question that he go back and look at the Productivity Commission report that he read our policy and I am confident that fair minded observers looking at our policy will accept that it is good for our economy, as well as being good for our society.

Having read the report a few times now, I’ll spare you the chore and will quote the pertinent statements which refer to PPL scheme’s like the Liberal Party’s:

It would also entail support for high-earning women, who already have strong attachment to the labour force, often receive privately negotiated paid maternity leave, and usually have better access to resources to self-finance leave.

So it’s expensive and that expense is to paid cater to women who already have pretty good access to leave. Not sure that is what Abbott had in mind.

OK, what about the benefits?

Payment at a flat rate would mean that the labour supply effects would be greatest for lower income, less skilled women — precisely those who are most responsive to
wage subsidies and who are least likely to have privately negotiated paid parental leave.

Full replacement wages for highly educated, well paid women would be very costly for taxpayers and, given their high level of attachment to the labour force and a high level of private provision of paid parental leave, would have few incremental labour supply benefits.

Now again, that doesn’t strike me as the Productivity Commission giving the Liberal’s scheme a big thumbs up. But then, I’m not probably the most “fair minded observer”.

But we don’t need to take the Productivity Commission's word for it. Joe Hockey this morning

“It applies to the people most vulnerable, those who are pouring the coffees, collecting the cups, those who are involved in the day to day work that many people take for granted,” he said.

“Often women on lower incomes, this is the shot in the arm that gives them income security and job security on a scale we have never seen before.”

Exactly right – it is those on low incomes who benefit most from paid parental leave. The benefits of applying to those on higher incomes is well.. “few”. And the cost of that is, shall we say, “not few”

Laura Tingle in the AFR pretty well nailed it:

The Coalition’s paid parental leave scheme is policy so bad, so appalling – on both policy and political grounds – that in any reasonable contest, it should give Labor a fighting chance to get back in the election race.

Spot on. Unfortunately for ALP supporters she was spot on with her next paragraph as well:

Unfortunately for decent public policy, and for us as taxpayers, we cannot be confident, on the basis of Labor’s political form in the campaign so far, that it will be able to consign this piece of irresponsible, populist junk to the dustbin of history.

For mine, yes you can argue the regressive nature of it, where the government is giving people more money because they earn more, but the big deal for me has always been that it is a waste of money.

If there was any sense of equivalent benefits to be gained from the cost, then I could get on board. I could be convinced that the amount should be capped at the median wage, but the costs of the Libs current policy is so utterly detached from any benefits that it is absurd.

The Liberal Party in what is apparently a time of a budget emergency is spending $5b a year on a policy which won’t achieve what they say it will achieve!

$5b a year gone for no gain. Think up some things that could be spent on that a year, and there’s you advert.

Forget rich mothers and poor, this is a $5b productivity measure which won’t improve productivity.

That’s the advert. Leave the rich-poor fight out of this. No one rich or poor likes a government wasting money for no discernable benefit.

***

Speaking of wasting money, a big “scoop” today was that some $5 million in cheques from the government for the GFC stimulus payments that have been sent out this year. I use “scoop” advisedly because Shane Wright of the West Australian actually had the story back in July:

Four years after they were mailed out to save the economy, 47,000 stimulus cheques remain uncashed ready and waiting to be spent.

Figures obtained by The West Australian show there is about $39 million in cheques stuck on fridges, attached to pin boards or hiding in shoeboxes.

The Tax Office distributed 8.8 million payments totalling $7.7 billion in late 2008 and early 2009.

But, yeah “exclusive”. And of course the Liberal Party was all over it.

Now it might be nice if the Liberal Party could come up with a better way of administering the tax system, but just as if someone was owed a tax refund for that year and they had not received it, it would be sent out again – especially if that person was late in doing their taxes. (I’m sure I’m not the only person who knows someone who has not bothered putting a tax return in one year and then finally gets around to doing it a year or so later)

But ok, maybe the Government should have included in the legislation that the cheques needed to be cashed by a certain date, but I doubt the legality of that would fly as my understanding is government issued cheques don’t have a statute of limitations

But hey, there were $7.7billion worth of payments. And we’re talking $5 million. That’s about 0.065%. The Libs are setting the bar pretty bloody high for “waste”.

Look, it’s $5 million in “waste”. Fair enough the Liberal Party are all over it. But geez, I can’t wait till they find out about the $5 billion that one party is blowing for no good reason.

***

On other policy things today, the Libs went full Laura Norder in western Sydney. Always good when a Federal campaign turns state government like.

Meanwhile Kevin Rudd was announcing a policy in aged care and putting $20 million in to a program called Active Ageing and also $357 million on health, in which he talked about the Liberals policy to cut Medicare Locals. 

Actually it’s not the stated policy of the Liberal Party. That would require the Liberal Party to have a policy. At present it’s all a bit vague and involves reviews, and then the cut (probably).

Maybe at some point we will be deigned worthy enough to get some details, but I doubt it.

***

But look it could all be worse. You could be the journalist who wrote this story:

***

Actually it could be even worse. You could be the journalist who wrote this story:

For f*cks sake. How pathetic.

I’ll go back and see all the criticism news.corp slapped on Tony Abbott for when he travelled to Afghanistan, you know like this one:

Was that necessary?

What about this one:

I mean for crying out loud, The Daily Tele has a gallery of photos of Abbott in Afghanistan:

God I have such contempt for that news organisation.

***

Enough grumpiness. Enjoy:

And so we reached the first real day of stupidity in the campaign.

The news.corp sites ran with a big scoop of Anthony Albanese having a beer with Craig Thomson in a pub in Sydney on Tuesday night. The photo which looks like it was shot with someone’s iphone on full zoom, has that nice fuzzy look that makes you think something dodgy is happening.

The story attempted to suggest something nefarious may have been going on perhaps the two were umm you know something something… or you know they might have perhaps ummm….  OK, look, when you get down to it they couldn't quite put their finger on anything that was actually wrong.

The “best” anyone could come up with was the old “it’s a bad look”.

Devastating.

At least it wasn’t a story about how Kevin Rudd brushes his fringe away.

There was policy announced today but probably the highlight of the day was a young kid photo-bombing Kevin Rudd at a school. The shot taken by Fairfax's Andrew Meares is one of those light moments that is nothing to take too seriously, but is still good. The SMH did go on just a bit too much about it, but heck it’s a smile and smiles are good.

The advocacy group GetUp! tweeted the photo initially without attribution which was quickly deleted and replaced with one acknowledging Meares. The Daily Telegraph then took the photo, put it on its on website, and suggested it came from GetUp! and the source was “supplied”.

After complaints by Fairfax, it was removed.

Flogging a competitor’s photo and claiming you got it from someone’s Twitter account?

Now that’s a bad look.

***

I know it’s early days, but something has struck me about this campaign. It is very dull. I don’t mean dull in that everyone is saying their talking points and no one has made any slip ups. Jaymes Diaz and David Bradbury’s respective interviews are wonderful moments of excruciation. And as we’ve seen, we have had some fun images.

But there really doesn’t seem to be any reason to this election.

What is it about other than not voting for Abbott or not voting for Rudd?

Without worrying about who has won each day, I think both leaders have been tired, and out of step. Abbott has been stilted and dull. And that is being kind. It’s almost like he has taken Rudd’s advice to take a Mogadon and have a lie down.

But Rudd as well has not been good. He has often sounded like he hasn’t quite got his lines set. He at times seems to struggle to find his words. Almost like he’s out of practice – which of course he is.

I think the ALP is in big trouble at this point.

“A New Way” is a dumb slogan that makes no logical sense, and Rudd this week has seemed a bit old.

I also think they’re in trouble because I don’t think people give a sh*t. My gut feeling is that (as I said on Day 1) people are pretty much tuned out, and caring more about the footy and real life. I’m a political junkie and I can hardly be bothered to watch any of it all.

Three years ago, and in 2007 as well, everyday seemed crucial, every interview a must watch, every debate a turning point. This week has really felt a bit “going through the motions”.

It is early days – in 2010 the Libs had a very slow first week.

But the ALP should be very worried if they’re finding that the electorate isn’t caring about the election because it is coming from behind.

So stop right now and think what the ALP campaign is about. I don't mean after-school care or keeping the carbon price or the NBN. I mean what is the soul of the campaign? If you are someone who doesn’t care about politics why are you voting for Kevin Rudd?

“A New way”? But they’ve been there for 6 years, so where’s the new?

A new way? But one of the first things they did was announce funding for the car industry. 

Couldn’t they be stronger, or smarter, or heck even just more vibrant?

Kevin Rudd was just on the ABC 7:30 and he kept trying to talk about “Seven pillars”. Now look I am a numbers nerd but even I was thinking, “Geez, seven pillars? Can’t you just talk to us in human language?”

At his point Abbott doesn’t really need to care about much – it’s the ALP that has to overcomes the “Meh, you’ve had your turn, let’s give the other lot a go.”

Back in 1993 that looked to be what would happen, but the GST happened and the ALP (and Keating) found a reason to convince people not to give the other mob a go.

And thus today we had the ALP getting pretty excited about this from the AFR:

Joe Hockey was quoted as saying that GST “was part of the equation”.

This isn’t really a shock – he has already been on the record as saying if you have a review of the tax system (as the Libs want to do – apparently the Henry Tax Review is old hat now) then you need to consider the GST.

So OK, fair enough the ALP want to try and make some hay out of it, but the GST can only be increased if all the states agree.

Now the only thing the ALP have going for them is the states probably will agree because they all know the federal government will get the political blame. So yes it is possible.

But my view is that Tony Abbott, were he to want to raise the GST, would take it to the next election. And I think had he gone up against Julia Gillard this election, such a tactic was writ in stone.

Exactly like John Howard in 1996 and 1998, the strategy was to win big in the first election and have enough of a margin so that at the following election you can throw in a few uglies . So had Abbott slaughtered the ALP under Gillard (which was likely), then I believe the next election would have seen the GST, and harsh IR all on the table, and few other things – the ABC maybe? And sure they would lose a few seats, but if they had a 100-50 seat margin – which was on the cards – then they’d be almost unable to lose.

Just wait for the next QLD election to watch what Campbell Newman will put forward. He has such a huge margin that he knows the next election is almost a walkover, so what better time to push through everything you know isn’t really popular, but where you will get over the line because the ALP is in ruins.

***

Anyway. To policy.

The Libs announced that they would be cutting company tax by 1.5%… from July 2015.

That’s a ways off, so were I a company director I wouldn't go locking it in just yet.

The main reason the LNP is cutting the tax is because they’re increasing the company tax for big business by 1.5% to pay for their Paid Parental Leave Scheme.

At present though we don’t actually know what their PPL will end up looking like. My belief is there is no way a 1.5% levy on big business will cover the cost of their original scheme and so it will have to be altered. They’ll probably not include state public servants, or some other such.

The reason is (as I have written in The Guardian) that when Abbott first announced that a 1.5% increase in company tax would pay for it all the amount of company tax expect to be raised was a heck of a lot more than it is now.

Back in the 2010-11 budget, corporate tax revenue for this current financial year was forecast to be over $75bn; in this year’s budget it was forecast to be only $71.6bn. The writedowns from the 2011-12 budget are even more severe. Back then, $81.5bn in company tax revenue was expected to be raised in 2014-15; in the May budget, the Treasury was expecting just $72.8bn. In last Friday’s Economic Statement they are hoping to get $70.15bn!

Clearly 1.5% of company tax revenue ain’t what it used to be…

Now the Libs are saying the cut will improve growth, and sure it probably will. But the benefits are easy to exaggerate. The Government's Business Tax Working Group noted in its draft final report that:

A cut in the company tax rate of two to three percentage points would be needed to drive a significant investment response.

It also looked at how the tax cut was funded:

Treasury modelling commissioned by the Working Group indicates that a reduction in the statutory company tax rate from 30 to 29 per cent would increase gross domestic product (GDP) and household consumption in the long run.

Importantly, the modelling assumes that the cut in the company tax rate is offset by a reduction in lump sum transfers to households to keep the government budget balanced. This is a standard technical assumption. The benefit of potential policy reform packages would, of course, depend upon how the rate reduction is funded.

Also bear in mind, for most companies this is not a cut – they will pay 1.5% extra for the PPL and then receive a 1.5% cut. This tax cut won’t even affect most small businesses because, as former AIG CEO Heather Ridout told ABC radio:

"Most small businesses pay tax through the personal income tax structure, so the gains for corporate tax reductions are much more for bigger companies, and for particularly foreign-owned ones."

Now yes Australia's company tax rate is high compared to many of the OECD nations:

But it’s not so simple as that, as Professor Rick Krever, director of the Taxation Law and Policy Research Institute at Monash University told the ABC’s Stephen Long:

… in many European companies, companies pay much higher social security taxes than they do income taxes. So if you just comparing income tax rates, you're not comparing anything, you're not comparing the true costs of companies of operating in different countries.

Also there is the issue that cutting the company tax rate provides greater incentive for high income earners to operate as an independent contractor and pay company tax rather than income tax.

So we have a policy that doesn't really cut the tax rate for the companies who will most drive any GDP growth you would expect to get from a cut in the company tax rate. We have a cut in the company tax rate at the time when expectations of company tax revenue have been declining.

It’s worth remembering that back in 2006-07 company tax revenue was equal to 5.3% of GDP; last year it was 4.3% of GDP.

Just imagine how much easier it would be to run your budget if you had an extra 1% of GDP in your accounts!

So to recap:

A cut that is not really a cut just a split into two taxes: 28.5% +1.5% (gee that sounds efficient).

Thus extra growth unlikely to be anywhere near what would it might be were it a real cut in company tax.

And it is a cut in revenue at a time when revenue is declining.

Interesting way to go about fixing a “budget emergency”.

***

One final thing about today. When the Libs announced this policy they provided the documents to the press gallery after the actual press conference started. Andrew Tillett from The West Australian tweeted that they were passed out 5 minutes after it started.

One journalist (I’m not sure but it might have been Andrew) noted this when he asked Abbott a question about it. Now I realise campaigns don’t want their policies leaked, but this policy HAD been leaked – it was in all the papers. If they are not prepared to give the documents 15-20 minutes before the announcement so journalists can actually ask some question that relate to the policy then they should be called out as dodging accountability.

I have in the past (rather infamously) had a go at the press gallery following the leaders around, but it is not all their fault – the parties are doing more than ever before to avoid scrutiny. But it needs to be called out – and the journalists should have no compunction about doing so. It is not about journalists making themselves the story, it is about leaders dodging tough questions – and I think that is a newsworthy story.

***

Tomorrow the latest employment figures come out. A big day in the campaign.

***

UPDATE. A few mates on Twitter remind me that at this point in an election voters usually aren’t listening. And that is true. Also Abbott had a shocker of a first week in 2010 and he came home with a wet sail. I don’t think it is over. But as I say, the ALP needs to improve. The one reason I think they might is they haven’t announced really anything yet, whereas the Libs have already gone in big with a $5b policy.

Still. 4 and half weeks to go…. Don’t put down your glasses just yet.

My Drum piece this week looked at the announcement of a $12b fall in expected revenue and the claims and counter claims about what this means about revenue and the budget.

As a general rule I hate it when people start talking about total tax in nominal dollar amounts.

Usually when they do they’re trying to sell you something. Like the Liberal Party is currently with this graph it has put on its Facebook page:

Well golly gee, it looks like tax revenue was flat – if not going down when the ALP came into office and then they got greedy and up it zoomed. Terrible ALP Government all about taxing you to death.

Well this is what the graph looks like if we take it back a few years:

Suddenly the decline in revenue in 2008-09 and 2009-10 (the only time since the Great Depression total revenue has declined two years in a row) looks a bit stark.

But as I say, total nominal dollars are mostly for propagandists.

Let’s look at revenue as a share of GDP, because that takes into account inflation and the size of the economy (because inflation affects GDP as well as revenue and first the big picture:

And now how it would look if we used the Liberal Party’s Facebook Advert time period (and I’ll even cut the hell out of the Y Axis to exaggerate the drop as they did to exaggerate the increase in nominal $)

And of course the talk was all about the 7% increase in nominal revenue. But a good way to look at the increase is in real terms

On this measure the Government has had a good increase in revenue – in fact at 5.3% it is just below the 5.4% average increase achieved from 1993-94 to 1997-98 when the Keating/Howard Governments took the budget from a deficit of 4.1% to a balanced budget. In the past three years average real revenue has increased by 5.0% on average – and yet Wayne Swan is supposed to have brought the budget back to surplus?

I think not.

My favourite graph of the day:

Wayne Swan was hoping to go from a deficit of 3% to zero in one year. It took Peter Costello 3 years, and the world economy was in a much much better shape than it is now.

One of the things I’m most interested in seeing come Budget day is the expenditure amount for 2012-13. In the MYEFO it was projected to be 4.4% less than last year in real terms.

That in itself would be rather stunning, but (to go back to nominal dollar terms), the MYEFO was still predicting expenditure in 2012-13 to be actually less in nominal terms. And that has never happened in my lifetime:

I’m not saying it should even happen – it’s pretty bloody severe austerity, which, because of the drop in forecast revenue Swan will get absolutely no credit for. But I am interested to see if it does happen (and also if any swifty accountancy is needed to achieve it)

My Drum piece this week was looking at suggestions the progressive income taxation is a bad thing, and that Australia has an overly progressive tax regime.

Among the graphs I used was the average tax wedge form the OECD data. One other lot of tax wedge data they released was "marginal tax wedge” which essentially looks at the rate of tax you pay for working say an extra hour – essentially what impact the income related taxes have on the incentives to work more.

Clearly Australia's rate is no less of a disincentive to work more than is the case in America, and we are a long, long, long way from the stereotypical high progressive taxing countries of Scandinavia.

And if we look at what the tax wedge is for your typical family with 2 kids, one parent at 100% of the average wage and the other at 33% (ie a part time worker), then again we see that Australia’s tax system is hardly a factor in people deciding whether they want to work more hours.

Now over at Catallaxy Files Sinclair Davidson has rather oddly accused me of “slight of hand” with my graphs on average tax rates of the flat rate because I chose a rate of 35%.

This rather surprised me because I chose it not for any nefarious means, but because that was the rate recommended by the Henry Tax Review as I noted in my blog post on the topic a week ago. The difference of course is the Henry Tax Review kept in place the 47% threshold for those earning over $180,000.

The Henry Tax Review Version looks like this compared to the current one:

And in terms of difference in tax paid as a percentage of income it would be this:

So I just kept the 35% rate but knocked off the 47% higher rate.

My point was that those in favour of a flat tax do so because it will lead to less taxation being raised and thus smaller government outlays – ie smaller government overall, and that it also favours the rich because they are the ones who currently pay the highest tax rate. As my final sentence states:

“When [the flat tax debate comes], remember what the fight is really about - the wealthiest paying a lot less tax, and a lot fewer services for everyone else.”

I guess I could have looked for guidance from Sinclair’s IPA 75 big ideas where they call for a flat tax. But oddly they’re not too desirous to put a number to it. But hey, I’ll play along.

Let’s compare the difference if the rate was 25%

Certainly everyone now is paying less tax. Let’s see how much less according to income: [UPDATE – My original graph was wrong, I’ve corrected. Not sure if anyone noticed, but anyway, thought I’d get in before anyone did!)

A big drop that just keep getting bigger. And once again – as I wrote in my article – that is always going to be the case when either moving to flat tax or just making your tax less progressive – the more you earn the bigger your tax cut.

Someone on the current median taxable income of $46,000 gets a tax cut of 2%, someone on $180,000 gets an 8% cut. Someone earning $548,000 (which is the average taxable income of those in the top 1% of incomes) would get a 16% cut.

I guess they just need it more.

But the bigger point is not that this is less-progressive, it is that it will bring in a shirtload less tax revenue. Now flat taxers no doubt like that. There may be a few deluded ones among them who think our current marginal tax rates are to the right of the Laffer Curve, but let’s stay in the realms of reality and assume (oddly) that if you tax people less, less tax is raised.

Well that’s fine. But when you’re looking at around an average 16% reduction in tax for those in the top 1% of the population, that would see the top 1% going from paying on average 41% of their $49.9 billion in collated taxable income to just around 23% which would see a drop of about $9 billion less in revenue just from the drop in tax paid by that 1%. And that’s each year. And remember the top 1% might pay a skewed amount of tax, but it is still only 9% of total tax. And remember as well income and withholding tax accounts for around 50% of all tax revenue, so we’re talking a massive smash to the budget.

And now you see why the IPA and those at Catallaxy love the flat tax. Less revenue means less government. Now that’s fine, but let’s not pretend that the above graph is just the only picture. Less tax revenue means less government services, be they education, health, social security, etc. Now they would of course argue that there won’t be so much of a need for government assistance or services because due to the income tax cut everyone will be doing so much better and will be able to pay for private health, education and other services that are currently provided through taxation.

Sure they will.

If there has been one aspect of the debate over superannuation taxes that has become clearer to me as it has gone on is that it is really just the first salvo in the war by vested interest groups, and equally vested media groups for a move to a flat income tax.

We now live in an environment where the suggestion of progressive taxation results in media articles accusing proponents of indulging in class warfare.

The front page of today’s Oz made it clear that superannuation is just the small fry. The bigger game is income tax.

The front page featured an article by Adam Creighton – he who last year called for policy to be less evidence based and more ideology driven (oh and democracy isn’t sustainable either) – which argued against progressive income tax.

The article’s headline gives away its intent:

Wayne Swan's rich targets already pay the bill

Creighton notes in the third paragraph that:

Australia's tax system is highly progressive, with a top marginal tax rate of 45 per cent - above New Zealand's at 33 per cent and the US at 35 per cent.

Now that would seem to make us the very epitome of socialism, but Creighton fails to mention a few other countries. Thankfully for us the OECD has the information and we can see that the UK for example has a top tax marginal rate of 50% [Neerav Bhatt on Twitter has reminded me that the Cameron Govt has just reduced this to 45%], Belgium has 50%, Germany has 45%, Israel has 48%, the Netherlands has 52%, and Japan is just below us with a 40% top tax bracket.

Now actually comparing the progressivity of different country's taxation system by looking at what is the top marginal tax rate levied by the central government is actually quite simplistic (borderline stupid, really), especially when you consider if you include (as the OECD does) Personal income tax PLUS employee social security contributions from the central and the “sub-central” (ie state Govts in the USA) then the USA’s top marginal tax rate comes in at 43.2%, and Australia is pretty much right in the middle of the OECD pack.

But as there are much better ways to look at progressivity of tax and I’ll do that another day.

For now let’s keep to flat tax and Creighton’s argument, which he states here:

Overall, the top fifth of taxpaying households are the only net contributors to Australia's welfare state, once handouts and use of government services such as education and healthcare are taken into account. The more you earn the more you pay, and at an increasing rate. A chief executive earning $1 million a year is required to pay more than $423,000 in annual tax, almost 40 times as much tax as a high school teacher earning $60,000 a year.

A junior apprentice pays an average tax rate of a little over 9 per cent compared with 38.3 per cent for the successful barrister.

Now I don’t know about you, but I am not too stunned by the fact that someone earning a million dollars pays a shirt load more tax than a school teacher, but apparently this is news (front page news at that). Indeed get me some feathers and knock me down, because did you know a barrister pays more tax than a junior apprentice?!

!!! (I mean wow!!)

Yes boys and girls, Adam Creighton has discovered that Australia's income tax is …. (get the kids to leave the room, this is pretty shocking stuff) progressive. (The Tele is right, Stalin is in control!)

There’s even a handy little graph provided (on the front page) to show us the injustice:

Now a few things about this graph. First. How about that scale! It certainly make for a big bow of progressivity!

But that diagonal red line is the key. That is The Oz letting you know that those teachers, public servants are getting in their view the equivalent of a tax concession!

OK. Let’s get to the graph. Here’s what Creighton’s graph looks like with the correct scale.

Not quite as impressive is it? That’s because the first 4 categories in the Oz’s graph occur in the first three income instalment in the real to scale version.

So OK, they use dodgy graphs to sell their point (beats the hell out of being honest with your readers I guess).

But let’s get down to it. Here’s the current Marginal Tax Rates, and I’ll go to $1m to match Creighton:

But the thing about taxation is just because you are in the marginal tax bracket of 45%, you don;t actually pay 45% of your income in tax, because of course the 45% rate only applies for that part of your income that is above $180,000. So a much better way to look at things is average tax rates:

So as you can see the line goes up fairly steep (as sign of progressivity) and then flattens out. From this you can work out that if say you earn $100,000 you’ll have to pay (before deduction and not including the Medicare levy) around 25% in tax, even though you are in the 37% tax bracket.

Now if we were to apply the logic of The Oz’s flat tax diagonal line, here’s what the average tax rate would look like compared to the current:

As you can see everyone except anyone earning $1m dollars pays more under this flat tax rate of 42.35%

Now maybe The Oz does think everyone should pay more tax, but no one – not even the lobbyists for rich people, says a flat tax should start at zero. There are many good reasons for having a tax free threshold, and other than social reasons, economically it make little sense to tax someone when they earn so little that the tax would actually be a disincentive to work and also would likely encourage cash in hand work.

The current tax free threshold is $18,200. Up till last year it was $6,000. But there is also a low income tax offset, which meant till last year the effective tax free threshold was $16,000, and now is $20,542.

Let’s assume the flat tax folk want to simplify the tax scheme (that’s often the reason given when they want to hide their real reason). So let’s not bother with the low income tax offset, but let’s start our 42.35% flat tax at $18,200, and see what happens to our average tax rates:

Notice anything that happened because of that tax free threshold? Yep. Because it lowers everyone’s average tax rate and because the top marginal tax rate is now 42.35% and not 45% that means those at the higher end actually would pay less tax!

How does that look in terms of difference of total tax paid? Have a look:

Yep, under this flat tax rate everyone who earns less than $707,400 pay more tax, those who earn over pay less.

But even the flat tax disciples don’t want this scenario. We only have to go back to Creighton’s article – it is the top marginal tax rate that is the problem. The Henry Tax review called for a flat tax of 35% starting at $25,000 and going to $180,000, at which point the 45% would kick in as usual. And because we’re dealing with real world ideas now, I’ll include in the current average tax rate the impact of the low income tax offset:

As you can see there is not as much change – because the rate isn’t as high, and also because the 45% top tax rate still exists. But some people still need to pay more tax, and some pay a bit less:

Those from $25,000 to around $165,000 pay more, and those after pat $297 less – it stays flat because that top tax rate remains as before. You can see there’s a big decrease in tax for those between the current effective tax free threshold and the $25,000.

But note who is paying the most extra  - those earning between $50,000 and $100,000 – ie those pretty much in the median income grades.

Equitable? I think not.

And remember as well that 45% tax rate is still too high under the Henry recommendation. The IPA in its infinite, paid for wisdom, suggests in it’s 75 big ideas that:

“Number 45. Introduce a single rate of income tax with a generous tax-free threshold”.

So let’s put that threshold at $25,000, where the Henry Review suggested and keep the 35% of the Henry review as well, but we’ll remove the 45% rate at $180,000 because the flat taxers only want one tax rate.

Let’s look how that compares:

And now we see the real reason why those who favour flat tax rates are usually those who either are rich, write for newspapers read by the rich, or receive donations from the rich to lobby on behalf of the rich.

So who would pay more or less compared to now?

Kind of stunning ain’t it.

But because looking at things in $ amounts can be misleading, let’s look at the change in tax paid as a percentage of income:

Always remember when someone starts talking to you about how there should be just one flat tax rate for everyone who really will be winning out of the change. Unless you happen to be one of Creighton’s barristers or chief financial officers, it most likely is not going to be you.