Trickle-down ore-anomics

Posted on 17 May 2010

Imagine if income tax worked like this. First, there’s a flat rate of tax based on how many hours you spend at work. It doesn’t matter how much your earn, you’ll pay this tax just for having “productive hours”. Next, on any income you make beyond the flat “hours tax”, you pay a flat rate of 30%.

Now, let’s imagine you’re in a job paying somewhat less than the average wage, but somewhat higher than the median wage. You make, let’s say, $45,000 per year gross. The flat tax that you pay for the privilege of turning up to work to be productive is $9,900. Once that’s subtracted from your gross income, you pay a 30% tax on the remainder. That’s a total of $20,430 in tax, an effective marginal tax rate of 45.4%. You bring home just $472.50 after tax every week.

But under this system, your neighbour next door (let’s call him Clive Palmer) is in a really nice high paying job. He earns $126,000 each year and is well into the high percentiles of earning in Australia. Just like you, Clive pays $9900 for the productive opportunity of turning up to work. On the remainder of his income, like you he pays a 30% flat tax. In total, Clive pays $44,730 in tax and comes home with $1562.88 in his pocket after tax each week – an effective marginal tax rate of 35.5%.

To me, this system looks very lopsided. It’s not hard to see that if your income were much lower, it’d hardly be worth working at all – you might as well go on the dole. And for some reason, the more you make, the lower the proportion of your income that you contribute as tax. It’d be a bad way of encouraging people to get into the job market and it wouldn’t fairly recoup tax revenue from those who earnt a lot of money.

I didn’t pull these figures out of thin air. You might want to take a look at this chart. It contrasts the current taxation situation on mining projects with that which would occur were the RSPT to be in place:

Today, the mechanism I described above is used to tax mining companies in Australia. If the mining project you embark on isn’t terribly profitable, you pay quite a high percentage of your income as tax. On the flipside, if the market is going gangbusters and your profits are high, you pay a declining proportion as tax.

When disgusting snorting billionaire mining magnates get on the television and cry poor, I can understand. Nobody likes to see their potential wealth decreased, even if you’re already filthy stinking rich. What I can’t understand, is why the Australian public are being conned into supporting the status quo, when what appears to be a much fairer alternative is on the table.

Take a look at that chart again. Unless you’re Clive’s personal yacht builder, do you really think his wealth will trickle down to you?


2 responses to Trickle-down ore-anomics

  • Ofir says:

    That’s a very good article, man. Kudos!

  • Cameron says:

    Cheers, yeah, the rhetoric on this issue has been pissing me right off.

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