Andrew Leigh

FLAT WRONG

HuffPost, 25 May 2017

If you have to blame anyone, blame Napoleon.

In response to the young French general’s early military successes, Britain in 1798 imposed the world’s first progressive income tax, with rates ranging from 1 percent to 10 percent. To save the English from having to speak French, Prime Minister William Pitt the Younger decided that the rich shouldn’t just pay more money, but actually pay a higher rate.

Today, there are a handful of countries that levy flat income taxes. In Russia, for example, all income taxpayers pay 13 per cent. But in most nations, taxes are progressive, meaning that the more you earn, the higher rate you pay. When the Beatles sang ‘Taxman’, they were complaining about the fact that their success had pushed them into the top tax bracket, where they paid a marginal rate of 95 per cent.

Unfortunately, when it comes to discussing Turnbull Government’s Medicare Levy increase, a surprising number of political commentators today seem to be confusing flat and progressive taxes.

Liberal Senator Scott Ryan thundered 'The top tax bracket - $180,000 and above – seven per cent of all income earners or just under, they’ll pay 27 per cent of the increase in the Medicare levy so it is highly progressive.'

Commentator Mungo MacCallum observed  'raising the Medicare levy, which in fact means an overall tax increase, is sensible policy, and, crucially it is fair.It is not a flat-rate, across-the-board, slug'.

An editorial in The Australian claimed  'Scott Morrison proposed lifting the Medicare levy from 2 per cent to 2.5 per cent from 2019 to meet the NDIS shortfall identified by the government. However unwelcome for taxpayers, that strategy at least affirmed “we are all in this together”. The levy is a progressive tax.'

All of them are wrong. When you ask a hairdresser and a surgeon to each pay 0.5 percent of their income, that’s a flat tax. 

What would a progressive approach look like? Helpfully, Opposition Leader Bill Shorten answered that question in his Budget Reply.

Under a Labor Government, Shorten told parliament, the Medicare Levy increase would be confined to those with incomes over $87,000. The result would be to shield four out of five taxpayers – around 10 million people – from paying more income tax.

To make up the revenue, Labor will retain the deficit levy for those with incomes over $180,000. More than nine-tenths of this will be paid by the top 1 percent of adults. Over the medium term, Labor’s proposals raise more revenue than the Coalition’s.

There’s nothing inherently left-wing about progressive taxes. After all, Prime Minister Pitt was a Tory. Progressive taxes simply reflect the reality that a billionaire has a greater capacity than a battler to pay for schools, roads and hospitals. To a cleaner, a higher tax burden might mean not being able to afford to see the dentist. For someone on the Rich List, paying a bit more may mean having to buy a 175 foot yacht rather than a 200-footer.

The past generation has been a pretty good one for those at the top. The income share of the top 1 per cent has doubled, while the income share of the top 0.1 per cent has tripled. Anytime you hear the rich boast that they pay most of the taxes in Australia, it’s worth reminding them that they also get most of the income in Australia. Inequality is now at a 75-year high.

While high income earners accelerate away, wages are stagnating at the bottom. One in five people say they cannot afford a week’s holiday away from home once a year. These are the people who Labor wants to shield from paying a higher Medicare Levy. The plight of low-income Australians is the reason why Labor is committed to a progressive solution to rising debt, rather than a flat tax on everyone earning over $21,655. When inequality rises, our tax system should become more progressive, not less.

There’s nothing fair about raising taxes on middle Australia and cutting taxes on millionaires. Raising the Medicare Levy is a flat tax change. Letting the Budget Repair Levy expire is a regressive tax change. Calling either policy ‘progressive’ is flat out untrue.