Why Costello is wrong on tax rates

So… Peter Costello, one of the major contributors to the problems with the budget, is calling for income tax cuts. Apparently, the levels he left it at aren’t right anymore.

First – it’s worth noting that he uses numbers deliberately designed to inflate his argument. Take, for example, the claim that someone on $100,000 is paying 39% tax, or 47% on $200,000 – it’s deceptive and ignores the fact that we have a progressive system. Someone on $100,000 is paying, at most, 24.9% tax – assuming absolutely no tax deductions. The individual on $200,000 is paying 32% – which, to be fair, is higher than the company tax rate – but all it takes is $4,000 in deductions to get below that.

Second – for most of the Howard/Costello era, the top tax rate (of 47% plus Medicare of 1.5%) kicked in at only $60,000 per annum. It didn’t start getting raised significantly until 2005. That individual on $200,000, adjusting for inflation, would have been earning about $150,000 in 2005, and paying about 38% effective tax.

Third – it was Costello who did a massive tax cut for the wealthy when he significantly jacked up the income tax levels in his last budget – a move that was essentially structural sabotage intended to cripple the ALP (who he knew would win the next election), and which walked right into the GFC. That debt he complains about? About half of that was a direct response to the GFC. The other half, of course, is from the Liberal’s own economic mismanagement under Abbot and Turnbull.

Less than 10% of Australians earn over $100,000 per year. Only about 2% earn over $200,000 per year. These are not people doing it tough. They aren’t necessarily rich ($200,000 per year doesn’t actually go that far in Sydney for a family household paying a mortgage), but they’re a lot better off than the vast majority of Australians. Heck, only 31% of households have a combined income of $100,000, and less than 7% of households achieve $200,000. They aren’t the ones who need tax relief. If anything, they’re still coasting on the tax relief given back in 2007.

If Costello thinks that an effective tax rate of 32% on $200,000 is too high now, he needs to explain why an effective tax rate of 38% on $150,000 was acceptable in 2005 – back when Australia was bringing in much more tax revenue as a share of GDP.

When Costello was treasurer, the lowest that income tax, as a share of GDP, got to was 10.2, in 2007 (the year of his big tax giveaway). It peaked (in the post-GST era) at 11.5%. Last year, income tax was only 10.4% of GDP. The argument that we are paying too much in income tax is simply ludicrous.

By contrast, when Costello was treasurer, corporate taxes were at about 6% of GDP. Now – only 4%. And Turnbull wants to slash that lower. Nearly all of the drop in tax revenue, as a share of GDP, has come from lower company taxes.

Author: Robert Watkins

My name is Robert Watkins. I am a software developer and have been for over 20 years now. I currently work for people, but my opinions here are in no way endorsed by them (which is cool; their opinions aren’t endorsed by me either). My main professional interests are in Java development, using Agile methods, with a historical focus on building web based applications. I’m also a Mac-fan and love my iPhone, which I’m currently learning how to code for. I live and work in Brisbane, Australia, but I grew up in the Northern Territory, and still find Brisbane too cold (after 22 years here). I’m married, with two children and one cat. My politics are socialist in tendency, my religious affiliation is atheist (aka “none of the above”), my attitude is condescending and my moral standing is lying down. View all posts by Robert Watkins