Taxing the rich until their PAYE pips squeak is pointless

STONE the crows! The Treasurer is talking spending cuts in a tough budget because energy exports are not generating revenue the way they did in the Howard years.[i]

It sounds improbable. The Reserve Bank index of commodity prices rose 30 per cent in Australian dollar terms in the year to March so surely somebody is making a taxable profit.[ii] But the assertion ensures Mr Swan can circumspectly get the fact that Canberra is living beyond its means on the agenda without mentioning the ever-escalating cost of health and welfare.

The US has the same problem – in spades. The federal government there is spending a motza more than it collects. As the report of President Obama’s Commission on Fiscal Responsibility and Reform makes clear, by 2025 federal revenue will cover interest payments, welfare and health – and that is it.[iii]

The question is how to bridge the gap between what governments collect and spend. To his credit Mr. Swan talks about spending cuts while Mr. Obama energises his base by demanding tax hikes for the well heeled. [iv]

But whatever the Treasurer says the Crows reckon it will not be long before the Greens and their ABC operatives start saying the same thing here – that the rich should pay.

There is just one problem with this strategy, it will not work. You can squeeze top income earners until their PAYE pips squeak and it will not fill the cash chasm between government income and outlays in either country.

As the Wall Street Journal points out, if the US confiscated all of the income earned by the top 1 per cent of taxpayers’ (incomes of US$380,000 plus) it would raise $938 billion, “which is sand on the beach amid the $1.4 trillion White House budget (and) a $1.65 trillion deficit.” Even if the IRS seized all of every income over $200,000 the Journal estimates the amount would pay the present US health and welfare bill, but not the one in five years, when supporting ever-more baby boomers will cost increasingly serious spondulicks. In essence, there simply are not enough rich people to pay for everything the US government spends.[v]

An approximate outcome would apply in Australia. In 2008-2009 just 2 per cent of taxpayers (184,000 people) earned over $180,000 and they paid 22.9 per cent of all PAYE contributions. To raise serious money Treasury would need to hit the 1.2 million income earners in the $80,000 to $180,000 bracket with higher taxes. Which no sane treasurer interested in staying in office is going to do.[vi]

Certainly one off savings can be made by cutting expensive indulgences. As George Megalogenis estimates, tighter means testing for family allowances will save the budget over $1bn in 2012-13.[vii]

But there are a lot of politically protected tax deductions which are much tougher to target. Taxpayers claimed $11bn in rental property losses in 2008-09 but Canberra would think twice before clawing any of that back, what with nearly $9bn being claimed by low and middle income earners.[viii]

The reality is the structural deficit, the gap between unavoidable outlays and long term revenue once windfall gains to government are cut out, is hard to end without pain for millions of middle-class taxpayers.

Australia’s structural deficit is now running at $20 billion but it is supposed to disappear at the end of the decade. [ix] However this will only occur if, as Treasury officials warn, the government sets fiscal targets designed to restore a continuing surplus, and sticks to them. [x]

Given Wayne Swan’s idea of restraint is a “cap on real spending of 2 per cent or less in above trend growth years,” the chance of anything other than cosmetic cuts that apply for a couple of years is unlikely.[xi]

Sure Mr Swan and the Prime Minister are talking about a tough budget, but it is hard to imagine it being draconian enough to deal with the structural costs of ever-increasing, health, welfare and aged care outlays.

So without enough rich to screw, taxpayers using the state to subsidise investments and an ever-increasing army of the old to support we run the risk of real surplus budgets being few and far between. The Productivity Commission warns the number of people 85 and over will increase by a factor of four by mid century.[xii] According to last year’s Intergenerational Report, age pension payments alone will double to around 4 per cent of GDP over the next 40 years.[xiii]

In the 1990s Australia was warned against marching down the Argentinean Road by relying on primary exports and avoiding productivity reform and spending discipline. Now we are at risk of following the US route, where the political class recognises government spending is unsustainable but lacks the courage and competence to do anything other than grandstand, with Democrats refusing to address health and welfare spending and Republicans demanding the poor be punished for not being rich.

We are a long way from this mess. General government debt in the US is around 110 per cent of GDP compared to 20 per cent or so in Australia.[xiv]

But we are heading in the same direction.

Let us hope Mr Swan turns out to be wrong about the minerals and energy boom and the company tax payments pour in because he really needs the money.


[i] Jeremy Thompson, “Swan prepares public for ‘unpopular’ budget,” ABC News, April 20 @

[ii] Reserve Bank of Australia, “Index of Commodity Prices March 2011,” April 1 @

[iii] Commission on Fiscal Responsibility and Reform, The Moment of Truth, December 1 2010 @ recovered on April 24

[iv] Brad Norington, Obama’s bid to beat the deficit: tax the rich,” The Australian April 15

[v] “Where the money is” The Wall Street Journal, April 17

[vi] Australian Taxation Office, “Taxation Statistics 2008-09: personal tax”, 25 @

[vii] George Megalogenis, “Swan’s $15.5bn in hidden savings,” The Australian, April 25

[viii] ATO, op cit, 16

[ix] John Kehoe, “Budget’s structural deficit needs addressing,” The Australian Financial Review, February 2

[x] Tony McDonald et al, “Estimating the structural budget balance of the Australian Government,” Economic Roundup (3) 2010, 51-79, 76 @

[xi] Wayne Swan, “Economic impact of recent natural disasters: Ministerial statement, March 23 2011” @ recovered on April 24

[xii] Productivity Commission, Trends in Aged Care Services (2008) @

[xiii] Treasury, The 2010 Intergenerational report @www.treasury/gov/au/igr/igr2010

[xiv] Ben Potter, “Time is running out and the final bill is about to land with a thud”, Australian Financial Review, April 21