I had two economics teachers at high school. One was diligent and not very bright. The other was a slacker.
The diligent one took the standard wisdom of the time and we were required to regurgitate it at exam time. Direct incomes taxes were progressive and indirect sales taxes were regressive, we regurgitated. A sliding-scale income tax which increased in percentage the more the income was a Good Thing. This economics teacher (late 1960s) also taught us that Greater Leisure would be the biggest problem for economists and society to solve in the closing decades of the century. As I say, he was diligent and not very bright.
The other, a Yorkshireman, did very little preparation. “”Soomorise Chapter Four and oonswer questions at back of chapter,” were standard instructions.
Hence confided that he never bothered to recast exam questions from one year to the next.
“”All I do is change answers,” he guffawed in deep Yorkshire.
It is a hoary old economists’ joke, but true none the less. And even truer of economic life than academic economists’ exams.
Of course, the answers change. Human responses to outside stimuluses change. If you tax “”income” (read wages) people will get wealth through other means than income.
The diligent teacher (who weekly asked questions about the economy to a mute class and then triumphantly trumpeted the answers with a copy of the latest Reserve Bank bulletin from behind his back) continued with his twaddle about regressive direct taxes.
This week we have been treated to extensive research by the University of Canberra’s National Centre for Social and Economic Modeling. The research tells us that income taxes are progressive and that indirect and companies taxes are regressive.
The poorest households pay 35 per cent of their income in company and indirect taxes (presumably on goods which are taxes on sale or through company profits); middle Australia pays 28 per cent of their income on these taxes and affluent Australia pays 23 per cent of their income on these taxes.
The research says income tax, on the other hand, is progressive. More affluent have a higher percentage of their income taken in income taxes.
This accepted wisdom, though, does not take account of changing answers to the question.
The only way the poorest can avoid company and indirect taxes is to abandon taxes on good altogether. If the poor are to eat, clothe and entertain themselves, they must pay taxes if we are to have any taxes at all on consumption items, food, clothing and entertainment. In fact, these taxes, of their nature, are very progressive forms of taxation. The more money you have the more you consume and even if the tax on goods is levied at a uniform rate, the more tax you will pay. Consumption increases as wealth increases. If you tax consumption you tax wealth.
Income tax, on the other hand tends to be regressive. The middle pay proportionately higher. The people on higher “”incomes” just change the answers; the money coming in no longer fits whatever definition the Tax Offices happens to use to describe “”income”. Their wealth production comes through non-“”income” streams — tax havens, trusts, deferred capital gains, negative gearing and the like, and even straight evasion. Middle-income PAYE slaves just hold out their hands for the Government to slap.
Income tax is even more regressive for the welfare trapees. Welfare benefits are means tested. The means test works on a sliding scale so the welfare payment gradually cuts out as income rises. And tax gradually increases as income rises. The result is that people coming off $8,000 worth of welfare on to $12,000 worth of income find themselves paying the highest marginal rates of tax imposable in Australia — high marginal rates than Kerry Packer or even higher than wage slaves like me who pay higher marginal rates than Kerry Parker or Rupert Murdoch’s companies.
Income tax is excessively regressive on self-funded retirees earning up to $20,000. Their marginal rates are higher than wage slaves on the same money.
Opposition Leader Kim Beazley has promised to do something about the high marginal rates facing the welfare recipients. Prime Minister John Howard has promised to switch tax away from “”income” to consumption.
At present we need a combination of both, without ideological baggage. The fragile alliance between business and welfare shows the way.
High consumption and service taxes (which the wealthy must pay if they are to enjoy their wealth) is one side of the coin. The other is to prevent the heavy taxation of welfare recipients and self-funded retirees to give them greater incentive to earn more.
But whatever happens, do not expect it to be a panacea for very long. Prepare to have to revisit the tax system after a short time because whatever the changes, human behaviour will change in response to them. The economists can always set the same questions, human nature dictates that the answers will always change.
And my other teacher’s theory about increased leisure is just another piece of economists’ nonsense. There is no increased leisure — just enforced idleness for those who cannot afford to enjoy it and more work for those with no time to enjoy the fruits of it. He got the question right (more efficient use of capital by labour) but forgot to change the answer — fewer people doing the labour.