Presently in Australia, like many other countries, we have a ‘progressive’ tax system, where higher earners pay higher marginal tax rates. This kind of system is almost universal, and has been adopted on the basis of ‘fairness’, i.e. the age old social-democrat/socialist ideology that people should “pay according to how much they can, and receive according to how much they need”. The trouble with this kind of system is that it stifles incentive. The more successfull you become, the more inhibition there is to succeed more. To remedy this, many Conservatives and Libertarians, including myself, have strongly advocated a flat-tax. That is, a single income tax rate that is the same for everybody, independent of how much they earn. While I strongly support this kind of system I’m tempted to ask the question “why not go one step further and introduce a reverse progressive tax system?”. Specifically, one would have a cascaded tax system, but the highest marginal rates would kick in for the first dollar you earn, and then every dollar after that the tax rate becomes progressively less. This might seem a little radical, and probably it is. But it’s worth considering the merits of such a system. A tax system structured like this would massively add to the incentive to develop and earn more, and to seek promotion and bonuses. And the incentive would increase with every extra dollar that people earn. I realize that this idea is completely, 100% politically unviable, but I think it’s an interesting idea nonetheless.
15 thoughts on “A reverse progressive tax system?”
It would kill people starting out. Particularly if there was no minimum wage. Perhaps you could have a regressive system that kicks in at, say, 30,000 AUD and gradually tapers away to nothing.
This is a terrible idea Peter!
Let’s start with the empirical question first: You say that our progressive system is based on a social-democrat/socialist ideology which is untrue. Yes Marx’s great principle, “from each according to his ability to each according to his need” (Marx wasn’t gender neutral) has been influential in shaping the social justice system in Australia. However, I reckon Rawlsian principles of equality are more relevant. Rawls, in trying to imagine the fairest society, concludes that if all the historical biases and prejudices were removed from the equation (eg. gender, class, race) everybody would prefer to live in a society where equality and equality of opportunity were paramount. You are right in assuming, like Rawls, that everyone is equal; but unlike Rawls, wrong in assuming that everybody is treated equally and that everybody has equal opportunity.
Now the normative question: Is it really fair to tax everybody in society at the same rate? Even though cicumstance of birth should not be morally relevant to the liberty you enjoy, it is practically relevant. Some people are born with disabilities, is it fair to tax them at the same rate as an able bodied person. Your argument rests on the principle that people ought to be rewarded for hardwork and ingenuity. I agree with that. However, I cannot agree that people ought to be punished because they had the hard luck to be born simple, disabled, a woman or worse. Furthermore, progressive taxation isn’t about punishing people who do well, it is to ensure that people are not enriching themselves at the expense of others. Distributive justice ensures that those who are at the bottom also benefit from the liberty and equality enjoyed by society at large. A progressive tax system allows for inequality…it just doesn’t allow for radical inequality. Guaranteed your proposal would result in radical inequality.
I appreciate your thoughts, but as you’ve probably gathered, addressing inequality is secondary to me. I’m more interested in ensuring that everyone improves to the maximum possible extent on an absolute scale, rather than everyone imporving in tandem on a relative scale. I don’t care if Bill Gates doubles his wealth this year. The important thing to me is that the poor people are better off this year than they were last year, even if they didn’t improve at the same rate as old Bill. People frequently cite the fact that in our country, and all other capitalist countries the rich are getting richer at a faster rate than the poor. This is true, but this does *not* imply that the poor are getting worse off. No, indeed the poor today are much better off than yesterday. The reason for this is that economic growth across the economy has created better, higher paying jobs for everyone, including those at the bottom.
Ah yes ‘the invisible hand’!
I don’t believe in invisible things…like gods, or hands that diffuse wealth gained by few to the masses.
Still, you are a battle axe if you can stomach the implications of what you are saying.
If you delve into the economics of happiness done by people such as Richard Layard (I think the first name is right) from the London School of economics you may start to see some downsides to your suggested policy.
One must assume that increasing the happiness of a society is the ‘best’ aim of government/economic policy for the following few arguments to hold:
If anything, higher incomes should be taxed at even higher rates to provide a disincentive to work very long hours as it tends to make people less happy overall.
If my memory serves me correctly, societies with smaller gaps (in relative terms) between the ‘rich’ and the ‘poor’ tend to report higher levels of happiness.
Some other research indicates that once a country hits about $20,000US per capita in wealth, its people’s reported levels of happiness flatline or decrease. Keeping up with the Jones’ who can’t keep up with themselves, the hedonistic treadmill and reduced social institutions.
I’m keen to hear your response as you were a far better debater than I the last time I saw you in action.
Disencentives to work are a good idea beyond a certain point for the sake of people’s long term happiness. Hence some economists promote having higher marginal tax rates than those in Australia.
Reported happiness has been found to flatline at around the $20,000US per capita mark.
Ah, frack it. My finest piece of stuffing words around until people are convinced they make sense….gone, up in cyberflames.
In short Inequality matters not because I have less stuff then you, but because it propogates unequal power relations which lead poor people to be a) worse off materially (debatable, this one) and b) worse off in terms of freedom, self, sustainability, self-empowerment and, more problematically, happiness.
In other words the libertarian position is naive, and could perhaps function in another, better, perfect world where peopls are born into roughly equal opportuniy. therefore emily’s is right to challenge your ideas on inequality grounds, though her case is much stronger on a global level,and possibly underestimates the ability to flatten or even reverse tax rates in an increasingly proseprous Australia.
Whether it is moral for one country do this in the context of a world which cannot is another question. Do low tax rates and a higher productivity in Australia actually benefit the rest of the world?
If not, then is it moral to purposelly stifle the growth of Australia in order t ensure a steady global growth? Or perhaps there should be a system where after a certain point
our national profits are siphoned into a system designed to help the rest the world ‘catch up’…I know, Pete, you’ll dispute the premises behind all that, but I’m willing to defend it from the ground up.
I’m willing to defend it to the death.
You have a record of being very social-minded and donating to charities. Therefore, I do not believe that your idea is really what you would like to have introduced. But why even put it up for discussion? As you state yourself, there is no way it will ever be introduced. Inequalities are bad enough as they are, and no further mechanism is needed to make them stronger.
Just because an idea will never ever be introduced doesn’t mean it can’t be discussed for academic interest. I don’t believe that there will ever be a solution to the greenhouse gas problem either, yet it’s still beneficial to discuss various ideas.
In 1987 almost every member of a New Zealand Labour Party cabinet voted for a flat tax. It subsequently ripped the Government apart and didn’t eventuate but it’s not beyond the bounds of possibility! Which is not to say that I personally advocate a flat tax rate!!!
Ooops you are advocating something even crazier than a flat tax rate! Silly me, I tent to think that really won’t get up.
I’m not advocating it. I’m merely putting it forth for academic discussion… I advocate a flat tax.
The probability of someone reading this post is very little. Nonetheless, I’d like to give my opinion as a high school student. You argument in the early part of your writing was quite crazy, for lack of a better word. Imagine that the government introduced a flat tax of $30, 000. Those in the lowest income quintile would have very little left over to purchase a house let alone a car. Those on higher incomes wouldn’t feel the strain at all. Then think about the government revenue; after all, that’s where the tax goes. It would be very little and how on earth would tehy be able to help teh unemplyed and disabled. Before reading your strange response and dim-witted arguments I actually considered you quite intellectual for thinking about the reverse tax system.
Yesterday while waiting in line to vote here in Ontario Canada I was thinking about progressive taxes. I came up with this same idea that was explained so well here. When I thought through this whole concept i became convinced that if Canada were to do this, we would end up with so much new tax revenue that we could pay off our national dept in a few years. Well done Sir, We need get a study done on this.