Alternative in Tax Reform (Article)

[thushan]

http://www.theage.com.au/federal-politics/political-news/labor-to-slap-new-minimum-tax-rate-on-the-super-wealthy-20150724-gijnqq.html

Thoughts?

Personally I think the sentiment is reasonable; however, I wonder whether that model would cause people earning $300,001+ per year to actually have a lower income than people who earn $299,999, who are able to use creative accounting to reduce their tax to a much lower amount without having to pay the 35% flat rate.

If the model could be fixed up to ensure that those who earn more should end up with more money after tax is deducted so as to assist in increasing productivity, it'd be better.

In short - we want to have adequate amounts of tax, mainly from people whose utilities would not be significantly decreased (i.e. the higher income earners), but we also need to ensure we reward hard work by ensuring that a person who earns $300,001+ ends up with a higher after tax income than a person whose gross income is $299,999.

My suggestion would be to have a similar policy to Labor's proposal, but only apply it for every dollar ABOVE $300,000. This wouldn't be perfect either, and further adjustments can be made to fix up the issues created by my suggestion.

[Professor Polonsky]

Not such a big concern. Even if it won't be marginal, the incomes of people who would have to pay our version of the AMT would usually be far higher than $300k.

[slothpomba]

This is a good idea. It makes simple sense really. Warren Buffet (owner of the very large and successful mutal fund, berkshire hathaway) realised he was paying less % of his income as tax than his secretary, even though he is worth billions. Something like that simply shouldn't happen and the system is obviously not working.

Ideally it should be a gradual curve. Despite having discrete tax brackets, it's not a hard shift from one to the other. It still all actually operates along a curve. As you can see from the image below, even though the brackets have discrete cut-offs, the actual tax rate paid is smooth. Ideally we retain this property.



I think the reason they set a total minimum is more so it cannot be evaded, i.e. you must pay *at least* this much tax no matter what, if you earn over a certain amount.

Of course this goes into the deeper issue of why we tax, who we tax and what we tax. If we could raise tax money via another method, should we still persue this as well?

There are many tax breaks (legal loopholes) used very disproportionately by the wealthy such as negative gearing, capital gains discounts, superannuation taxation, etc. These could alternative be fixed and the need to use the above measure may be eliminated.

At the end of the day, many people will try to evade paying tax or legally minimise their tax. Some argue the best way is just to raise taxes that are very hard to be avoided and do not reduce economic output very much (so called "efficient" taxes). This applies to things like GST and a tax on the value of land you own. You can't really move your land overseas and if you live in Australia you will always need to purchase goods and services. In this way, these taxes are almost impossible for even the richest to avoid.