Hit the very wealthy with more tax, as Robert Menzies did

Average Top Income Tax Rates and Government Size, 1870-2010

If only Labor had taken a leaf out of Robert Menzies’ tax handbook and proposed a 75 per cent top marginal tax rate on incomes above £10,000, rather than its proposed tangle of lame tweaks, we might have had real tax reform in prospect. That was the 1951 marginal tax rate for incomes above what is equivalent to $425,000 today. The Liberals dropped it to 67 per cent in 1955, where it more or less stayed until the mid-1980s, and lifted the threshold to what was the equivalent of $540,000. That sounds about right to me.

In any mixed economy such as Australia’s, which is compromised by oligopoly, soft corruption, regulator capture and huge direct and indirect subsidies to various industries (especially banking and ­finance), the idea that enormous individual incomes result solely from individual effort and innovation alone is silly.

That’s even before you consider the significant argument that someone on $200,000, especially if they are supporting a family, will notice $1000 much more than someone on $800,000. That they pay the same marginal rate in Australia is an insult.

New York Democrat congresswoman Alexandria Ocasio-Cortez courted fury in the US last weekend proposing a top marginal tax rate of 70 per cent for income above $US10 million ($14m), well above the top rate of 37 per cent, which cuts in at $US600,000.

US President Donald Trump, as reported in Bob Woodwood’s Fear: Trump in the White House, wanted to lift the top US tax rate to 44 per cent but was talked out of it by Gary Cohn, a former Goldman Sachs trader who personally had made tens of million of dollars from the bailed-out bank. Trump’s instincts were broadly right: a very high top marginal rate would provide political cover against charges of favouring the top end of town in any radical reform to simplify and slash the tax burden on middle-­income earners.

Labor’s policy to lift the top marginal tax rate to 49 per cent — which would apply to a million workers by 2025, according to Treasury — is shameful unless the threshold at which it applies were lifted dramatically.

In 2008, the top rate cut in at 2.6 times the average wage in Australia, about the OECD average. Currently, it’s 2.2 times given the threshold hasn’t been adjusted for a decade. The 2010 Henry tax review recommended a top rate at three times, about $240,000 in today’s terms.

Labor wants to smash workers earning between $200,000 and $250,000 a year in particular, given the party also has promised to reduce the threshold at which compulsory superannuation contributions are taxed at 30 per cent rather than 15 per cent.

In 2017, the BBC reported a shock increase in the number of Britons — 364,000, or 1.2 per cent of taxpayers — who paid the top 45 per cent British income tax rate, which applies to earnings above £150,000 ($268,700).

This year, in Australia, 5 per cent pay our top rate.

Some worry that high marginal rates at very high levels of income will sap effort and innovation.

Yet economic growth per capita and productivity were all higher during the 25 years after World War II, when such taxes were more or less standard. Respect for business leaders, government and social cohesion was higher, too. It surprises some, but money isn’t the only motivation for excellence and effort.

Statistics on surging cocaine imports are an interesting indicator. As actor Robin Williams fam­ously said, cocaine is God’s way of telling you you’re making too much money. The Australian Criminal Intelligence Commission sounded the alarm in September, pointing to “record” imports of cocaine. “Substantial increases in cocaine border detections and national cocaine seizures and arrests were reported in 2017, and are all at record levels. Australia pays some of the highest prices in the world for cocaine,” it added, noting seizures had more than tripled in three years.

Criminals don’t run the huge personal risks of smuggling it here without being able to sell it. Seemingly surging cocaine use suggests some high earners — cocaine isn’t cheap — could pay a bit more tax without undermining effort and innovation. Having a bit less money for some Australians to spend on expensive illegal drugs is unlikely to retard effort and innovation enough to hurt the legitimate economy.

More seriously, though, high marginal tax rates at very high levels of income might see fewer bright people gravitate to socially and economically useless but ­lucrative jobs such as lobbying and some areas of finance.

This week Labor bemoaned the lack of teachers with high university entrance scores. Well, if the prospect of earning millions from being a second or third-tier executive in some oligopoly weren’t so appealing, more people would choose teaching.

Higher tax on very high incomes would lessen top executives’ desire to achieve, or even bother setting, complex targets for “bonuses”, which the royal ­commission into financial services has shown can come at the ­expense of customers’ interests.

Butvoters will have little choice at the election. Both major parties promise to tinker at the edges of the tax system. Labor’s other plans — curbing so-called negative gearing and reverting to pre-2000 rules on franking credits — are defensible in principle, especially if the additional revenue goes towards cutting marginal tax rates. But, of course, it won’t.

Making refundable franking credits available only to pensioners will sharpen the incentive for retirees to arrange their affairs to receive a part-­pension. Expect to see a surge in the number of part-pensioners receiving $1 a fortnight.

Restricting “negative gearing” to “new dwellings” will invite legal debate over what “new” means exactly. Labor should have capped the annual dollar value of refundable franking credits or deductible net losses at, say, $10,000.

Shifting more of the tax burden to taxpayers who’d barely notice it need not increase the size of government. But it would make tax reform easier and may help cauterise crumbling respect for how the economy works.