Monday, October 03, 2011

Tax reform

Tax reform is THE topic in business and economics conversation at the moment. Europe is going through hell trying to re-balance various countries balance sheets, the US has blown out its budget trying to keep the economy from dying a dramatic death and now seems determined on using fiscal austerity to reverse this attempt as all the stimulus did was create stagnation (seems like hell is better than purgatory). Here in Australia, having a strong fiscal balance sheet and very little economic problems we've been inventing them and not wanting to be left out have created our own tax summit to be held this week in the lovely Canberra.

As per my previous post, I've been impressed with the amount of dodgy facts that have been presented by a variety of sources for each element of the tax and spend reviews that are busily being performed. Probably the highest profile of these is Warren Buffet's cry that the rich should be taxed more and that it is an outrage that he pays less tax than the average salary earner. Now, I don't have much issue with the possibility that the rich should potentially pay more tax. The Gini Coefficient in the US has been getting worse and worse over the past 40 years  and tax redistribution is the best way to make this trend decline. However, one of the knight in shining armour's claims is that he pays less tax than the average salary earner. He says he paid only 17.5% on his income last year. Is this true?

The answer is no and he must know this. His income comes from investment. Personal income from investment whether it be dividends or capital gains in America is taxed at 15%. However, this income is derived from the income generated by the investments made. These investments (mostly in companies) pay their own tax and hence their value is reduced by the taxes paid. If (as the Economist magazine has recommended) company tax was abolished then the value of all shares would rise significantly. Hence, Mr Buffets income would rise significantly. This means his current income is reduced by the taxes paid by the companies he invests in. As the company rate is 35%, you could add this to the 15% already paid and you would be closer to the true tax rate of Mr Buffet; that of 50%.

What is interesting is that while this obvious error is pointed out in this Forbes article, confusion then reigns in the comments and in his attempt to correct errors that aren't errors. More interestingly still is a different article that is trying to argue against Mr Buffet assertions to tax the rich more but accepts his statement of 17% and argues against the % on his receptionist/secretaries income (a trivial argument, who cares if its 31% or 29% it is still higher than 17). If an article trying to argue against the assertion misses the most obvious point then how are people ever going to know the real facts and lobby politically for the right tax outcomes? What chances for a decent outcome in Australia this week at the tax "forum"?

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