You may not have realized it yet, but the first shot in the ‘War on Tax Cuts’ has been fired. You may not have noticed it because it wasn’t fired on these shores.
Remember the saying, “When America sneezes, the World catches a cold”? That was usually used to explain how stock markets would follow the lead of the American markets and its economy.
Well, now we’ve got a 21st Century, credit induced version.
And in this case it isn’t about stock markets rising and falling, it’s about tax rates rising. Now that US President Obama has proposed increasing taxes on those earning over USD$250,000 (AUD$390,000) there is a strong incentive for the ‘allied powers’ to follow suit.
It will be a War on Tax Cuts. Or should we say a War For Tax Increases.
Remember that it wasn’t long ago that the ‘rich’ were paying tax at the top marginal tax rate of 47 cents in the dollar.
Today the ‘rich’ pay 45 cents in the dollar at the top rate.
The difference is that the ‘rich’ in 2000 was classed as anyone earning more than $50,000. Even when you take into account that fifty grand bought you more back then, it’s still hard to imagine that anyone on $50k should be thought of as rich.
But they were.
Amazingly, it wasn’t until the 2000-01 tax year that the highest rate was increased to a still shockingly low $60,000. Since then it’s taken another eight years for it to reach the current level of $180,000.
Someone earning fifty-grand in 1996 would have paid about 28% of their total salary to the tax man. Adjusted for inflation the same dollars in 2008 would be just over $69,000, but fortunately for the taxpayer, the proportion taken away in taxes would now only be 22%.
However, don’t forget that most of these tax cuts have come during the time of an economic boom and that while direct taxation has fallen, indirect taxation through the GST and other levies has increased.
But it looks as though the tax cut glory days are over. And that’s where Obama’s first effort in the War on Tax Cuts comes into play.
In Australia we probably have a little more breathing time. Perhaps until after the next election. But the tax increases won’t come en masse. The first ones to get the treatment will be those earning very high incomes.
In fact it could be the perfect opportunity for the government to claim they are doing something about excessive executive salaries. Don’t forget that for a top exec being paid, say $3 million, almost half of that will go to the government as tax revenue.
That’s why the government hasn’t been in any rush to introduce an incomes policy yet. Because if they do introduce a pay cap then guess what, tax revenues will fall – fat chance of that happening.
And there would be very few votes to lose if the government brought in a tax rate of 55 cents on the dollar for all incomes above $500k or $1 million.
The important thing is not to think that tax increases would stop there. They wouldn’t. Once the super-high income earners have been taxed it is much easier to sell the idea that the next level of high income earners should pay their way too.
And so on, until before you know it, wholesale tax changes have been made and the continuation of the redistribution of wealth from middle and high earners to low and no-earners is taken a step further.
Don’t get me wrong, this isn’t about kicking the low income earners a kick in the teeth (as some readers who responded to our article on the minimum wage in Money Weekend seemed to think) it’s about the dangerous shift away from private enterprise and personal responsibility towards the ‘nanny state.’
The best way to stimulate an economic recovery is to allow bad businesses and bad business managers to fail. And to allow more money to find its way into the pockets of individuals rather than being creamed off by taxes.
Increased public expenditure which draws on taxpayer funds, and which must necessarily mean higher taxes, because they won’t cut spending will only prolong the economic gloom.
There are further tax cuts to kick-in from July, but unless we are sorely mistaken, don’t expect to see further tax cuts anytime soon.