The social democratic (former) Howard government

I have argued before for the social democratic tendencies of the former Howard government. One basis for doing so is that upper income earners during the Howard years provided an increasing share of the government’s total income tax revenue.

With the release yesterday of the ATO’s 2005-06 income tax statistics, Sinclair Davidson has updated the series of statistics (1996 to 2003 here) he has been keeping on what proportion of all income tax the top 25% of taxpayers pay. As it did every year except one since 1996-97, the top 25% picked up a larger share of the tax bill in 2005-06 than it had the year before.

In 1996-97, the top 25% of income earners paid 60.8% of all income tax. By 2005-06 that had increased to 65.2%, compared to 64.3% the year before. That was despite the complaints back in 2005 (eg from Andrew Leigh) that the tax cuts implemented that year would be regressive.

Yes, this was off an increased share of total income – up from 50.5% to 50.9%. But such is the effect of still very high marginal tax rates that a 0.4% increase in the top 25%’s share of income translated into a 0.9% increase in the share of all income tax paid. It helps explain why overall income inequality is quite stable.

17 thoughts on “The social democratic (former) Howard government

  1. I suppose it’s an outdated view of social democracy, but my social democrats wouldn’t let the gap between the richest and the rest blow out too much (social cohesion and all that). On that basis Howard isn’t much of a social democrat. So what if the richest were contributing more of the total, if it’s still only a tiny proportion of their ballooning wealth?

    Andrew, because of your preoccupation with happiness I just read: http://www.nybooks.com/articles/21197
    and am informed that yellow is “the sign of warmth, enthusiasm, and, yes, happiness” so I think you should consider your readers and contemplate a blog re-design. We could all be happier if you replaced that depressing grey/blue with cheery yellow.

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  2. Russell – Though the key point is that governments did not let the gap widen after tax and spend (the things they control). You should have voted for Howard. I shouldn’t have.

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  3. Thanks for the plug. (Strictly speaking it’s net income tax paid). The jump for the top 25% was so large that I went back and checked the data to make sure I hadn’t made a mistake in previous years. Whether or not Howard was as much a conservative social democrat as Russell would have liked (that is always going to be a matter of taste) this sort of analysis shows up the nonsense of the ‘tax cuts for the rich’ commentary.

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  4. Sinclair Davidson’s suggestion that the most formidable opponents of small government are conservatives rather than social democrats is interesting. I wonder whether this could lead to a realignment of Australian politics.

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  5. Sinc – As I understand it, the main implication of this being ‘net tax’ is that FTB is affecting the results, which would benefit the lower income groups the most.

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  6. The desire to bridge the gap between the rich and poor can never be satisfied and so the egalitarians can feel good about raging and demanding more redistribution for ever. There is a different approach, to focus on the things that need to happen to help the able-bodied poor to improve their situation by their own efforts. Things like eliminating minimum wages so they are not priced out of work, decent school education so they and their children can read and write.

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  7. Andrew, the share of tax paid by the top is a function of two things: the pre-tax share of the rich, and the tax rates. Since we know that the tax scales became less progressive, Sinc’s results tell us that the pre-tax share of the rich went up.

    By coincidence, I have a paper coming out soon in the National Tax Journal that deals with a problem a bit like this: if you want to know how progressive the tax scales are, then you need to do a simulated exercise in which you plug the same cohort of people into successive years’ tax scales.

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  8. Andrew L – I’m not sure where your argument is leading. Do social democrats want a progressive tax scale or a progressive tax system?

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  9. Rafe and others:
    I agree that egalitarians can never be satisfied. But I think we also have to accept that it would be virtually impossible for a political party to win more than 50% of the popular vote with a classical liberal policy agenda. So that means classical liberals have to form a coalition with some other group. Traditionally, they have found common cause with conservatives (because conservatives tend to respect property rights) but these days conservatives seem to think that high-income people have a duty to pay high taxes to pursue collectivist objectives e.g. saving the traditional single-income family from extinction. So, that suggests to me that classical liberals might actually have more in common with those social democrats who would prefer to see tax revenue being used to give greater opportunity to the poor. The social democrats I have in mind are more likely to be Rawlsians than egalitarians.

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  10. Over the longer term, the Coalition’s changes to the super tax arrangements will (if left unchanged) dwarf the impacts of its fiddling with the income tax rates and thresholds. The super changes allow (high income) taxpayers to pay only 15% tax on any super salary sacrifice contributions of up to $50,000 per annum and more significantly abolish tax on payouts.

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  11. Andrew – Yes, but as I pointed out in the post their share of income went up by less than their share of tax, because while the tax system became slightly less progressive it was still progressive. If you work out their average tax rate, it went down from 32% in 2004-05 to 31.3% in 2005-06, not exactly a huge cut.

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  12. Thanks Winton, but i don’t see any problem in picking up votes from an informed and economically literate electorate with a classical liberal agenda.

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  13. Sinc, I think the left want a progressive tax scale. My point is that the rich will pay more if we have (a) more pre-tax inequality, or (b) more progressive tax scales. It therefore helps to keep the two distinct from one another.

    While I’m fascinated by (a) and (b) individually, I’m afraid that I don’t find % tax paid (=f(a,b)) to be an interesting number.

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  14. I understand your interest in (a) and (b) – while not sharing any concerns about (a) and disagreeing on (b). I think ignoring %tax paid (=f(a,b)) people would be overlooking important information about how (a) and (b) relate to each other. Now I know you do understand that relationship but choose to have an open mind (or at least downplay that relation to others you find more interesting), but there are many, many out there who do not know it at all and who continue to be surprised when confronted with that stat. It very much undermines the populist understanding of tax reform – especially the anti-tax reform agenda.

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