A “fair” tax system
A call for a "fair tax"
Last week a Labor politician criticised the budget tax breaks for the high income earners are “unfair”. It was “unfair” that someone earning $40,000 should have the same tax rate at someone earning $120,000.
I thought this was an interesting argument. What is the definition of a “fair tax system”?
And as I explored the idea I realised that a “fair” tax system is not all it is cracked up to be.
Definition of "fair"
Before we get too specific, what does it even mean to be fair?
The dictionary definition for fair is:
“treating people equally without favouritism or discrimination.”
That seems simple enough – we just need to treat people equally.
Fair tax options
So how can we treat people equally when it comes to tax. Here are some immediate options:
1. Equal tax rates
Why don’t we just tax everyone at the same rate?
That’s totally fair. Why should a highly paid surgeon be taxed at a higher rate than a burger flipper? They are both humans and should be treated the same. They both work hard to earn their income so it should be treated the same.
It would be very easy to implement – we just wipe out income tax and increase the GST to 25%. We could do it overnight.
Except the surgeon is paying a LOT more tax than the burger flipper, and that’s not fair.
2. Equal tax
Why not just have an equal tax for everyone. A flat amount. Everyone just has to pay $10,000 (for example) tax each year. That’s fair. Then there is absolutely no differentiation between people.
It doesn’t matter if you earn $50,000 a year or $100,000 a year. Perfectly fair.
Too bad if you only earn $11,000 a year, or even worse, $5,000 per year.
So maybe it’s not the tax rate that is unfair, or the amount of tax, maybe it’s the amount of money we take home that is unfair.
3. Equal pay and equal tax
Let’s just pay everyone the same amount, so that they can pay the same tax, and there is no problem with people having it all taken away.
But what happens if someone is working overtime? What happens when people choose to invest their money? Why would someone choose to do a hard degree and better themself if there is no financial reward.
Oh, and let’s not forget that there is a name for this approach – it’s called “communism”.
And history has shown that it fails.
Tax is not fair
Let’s be brutally honest – tax is not fair. Let’s stop pretending. Here is what we know about the Australian tax system:
- If you don’t earn much, you don’t have to pay tax. In fact, the government will give you money. It’s called being a “welfare state”. We look after the poor. There’s nothing fair in giving money to one person and not another, but we believe that it is the “right” thing to do.
- If you earn a regular quid then you pay tax (or do your best to minimise it)
- If you earn more than most, then you pay proportionally more than most.
I think we have this notion that you need a certain amount of money to live so it can’t be taxed. Then you need a certain amount of money to be “comfortable” and that can be taxed a little bit. But then after that you have so much money you don’t know what to do with it, and so that should be spread about a bit more.
What about "reasonable"?
Is it reasonable for a richer person to pay more tax?
I have just recently returned from a charity bike ride to Thailand. I visited the slums and this is one thing that is undeniable – our country of birth and family of birth will have more impact on how much we earn than any other factor – and there is nothing that we did to determine it.
If you want to be rich when you are 30 then be born into a rich family. It’s the best way to achieve it. It won’t guarantee it, but it will definitely throw the odds into your favour.
As much as we try to deny it, Australia is a judeo-christian country. We have the concept of being “blessed” with wealth, and the responsibility or obligation to help those who are struggling. We think it is wrong for someone to starve to death, and we think it is every child’s right to have an education and chance in life.
It is on this basis that we think it is “reasonable” for the rich to pay more tax than the poor.
But what if we take this responsibility or obligation away?
What if we say that it is a free for all? Each man (or woman and child) for themself?
Is it reasonable to ask someone who has worked hard to move ahead to sacrifice more just because they have more? If someone works double the hours, is it reasonable to ask them to take less than double their income?
Personally, I like HECS (oops, sorry, FEE-HELP – I just demonstrated my age) as a reasonable tax. Further education will result in someone having a higher income (statistically speaking, though I know enough well educated poorer people). Why should the government not share in an individual’s success and use this money to help the next generation? That’s reasonable.
(Aside: I also think it is silly to tax education because education is the way a country becomes competitive.)
Tax is practical
I think it is safe to say it is practical to tax the rich and to not tax the poor.
Gone are the days of chasing peasants for tax. It is easier to chase the land holders because … they have more money.
And once again, let’s be really honest … we want people who have plenty of money but not too much.
At the top end of the scale, we have the ultra-wealthy but they have tax havens, and good accountants, and better lawyers. The one thing they don’t have is a taxable income. It somehow managed to disappear.
But there is that magical group who typically have a very well paid job, plus investments, and incomes that they can’t hide.
It is practical to tax them.
It isn’t fair. It isn’t reasonable. It’s easy.
And if you are Labor, then they aren’t going to vote for you anyway, so you can pick on them.
Should the rich be expected to pay more tax?
I had this debate with one of my sons. There are not many impartial arguments (like “fair” or “reasonable”).
In the end, I think that a caring, generous society will give money according to their ability. Caring and generosity are virtues.
What about one tax from $40k to $120k?
I would now argue that the $40k to $120k are now your working and professional class. They are all people who go to work each day, put in a solid day’s work and go home exhausted. You will find a plumber earning anywhere in this range. School teachers are in this range. Engineers are in this range.
Is it unfair that someone earning $40k should pay the same tax rate as someone earning $120k? Absolutely not.
And at the same time I think there are benefits. If someone works overtime, they won’t be paying higher tax on it. If someone works hard to earn a promotion, they won’t be paying higher tax on it. If someone invests, their earnings won’t be taxed at a higher rate.
While the gap between the rich and poor is growing, it’s not in this range that the problem is occuring. These people still have a pay slip.
And there ends my first political rant
I’m not running for President (oops, sorry, Prime Minister, but it’s hard to tell these days … that could be my next rant). I just don’t like it when stupid comments are made and the media laps it up.
