Keith Ng’s four tax myths

notices and features
7 years ago
Categories: class war, spin, tax
Tags: dodgy statistics, eric crampton, Keith Ng, myths, psa, spin, tax

A useful piece from Keith Ng (an extract from a new PSA booklet on topics in tax policy and practice):

Four tax myths that might pop up this year

Myth 1: “40% of households pay no ‘net taxes'”

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The problem with “net taxes” is that it excludes GST, which accounts for 32 per cent of all taxes. Not quite as much as income tax (38 per cent of all taxes), but it’s a whopping big heap not to count. It also only counts cash transfers – so if you get cash from the government, that gets counted, but if you get a service from the government (such as education, or healthcare) that does not.

“Net tax” is an arbitrary and meaningless way to count who is “contributing” and who isn’t. It exists as a political tool. Although it is produced by Treasury, Treasury themselves have never published it. It has only ever been released by the minister of finance’s office, and usually its first public appearance is on David Farrar’s blog.

Myth 2: The top 10% of taxpayers paying 46% of taxes proves they’re overtaxed

It’s true, the top 10 per cent of taxpayers pay 46 per cent of all income tax – but that’s only half the picture.

How much tax you pay depends on two things: a) the tax rate, and b) your income. It’s pretty straightforward, so it’s incredible how often people blame “high amount of tax paid” on the tax rate being too high, and completely ignore the income effect.

The top 10 per cent of taxpayers make around 34 per cent of all taxable income, nearly as much as the bottom 70 per cent combined. So while they pay a lot of tax, they also make a lot of money.

Myth 3: Bracket creep has reversed the effects of the 2010 tax cuts

…people are still paying less income tax than they did in 2010.

While bracket creep is rightly characterised as “a tax increase by stealth”, successive governments – left and right – have kept it as a handy political tool. It’s a mechanism that automatically raises taxes a tiny bit each year; over time, it gives governments the option to increase spending or to tweak the tax system.

Myth 4: Tax cuts pay for themselves

Here’s an idea: If everyone gave the government less money, the government would receive more money. This is not a joke. The 2010 tax cuts were estimated to cost around $1.1b over four years. But by 2014, the tax cut was supposed to result in the government receiving an extra $175m a year in taxes.

The magical part is a single line in the budget called “Adjustment for macroeconomic effects”. Treasury includes this because they believe that tax cuts will help the economy grow faster, and a bigger economy means more taxes.

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By the time 2014 rolled around, the economy grew slower than expected and tax revenue was $4b less than the 2010 forecast.

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The PSA’s “Progressive Thinking: Ten Perspectives on Tax” booklet features 10 authors, academics and campaigners writing journalistically on a broad range of topics in tax policy and practice. It is being released on Monday 22nd May in advance of the Government’s Budget, and will be available to read online at the PSA’s website from Monday 22nd onwards.

Keith Ng is a data visualisation consultant by day and data journalist by night, using data to understand and explain complex issues and policies.

Eric Crampton wrote a followup piece: Tax system is heavily reliant on high earners, and a discussion between Ng and Crampton followed on Twitter.