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Taxes and who payes 'em

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wilful

Larry Dwyer (12)
Thought that this would be an interesting addition to thoughts about taxes:

Listening to all the argy-bargy over the budget update makes you think - what strange things budgets are. The government spends all this money - hundreds of billions a year - but where does it come from? From us, of course. The politicians use the budget to take money from us with one hand, then give it back with the other.


They have one set of public servants to take our money from us and another to give it back. What's the point of all this "churning"? Wouldn't it be a lot simpler and cheaper to have lower taxes and lower spending?

If we each got back pretty much what we put in, it would indeed be a pointless, wasteful exercise. In reality, high-income earners put in a lot more than they get back, whereas low-income earners receive a lot more than they pay in taxes.

But even that doesn't adequately describe the rearranging brought about by the budget.

Every six years the Bureau of Statistics conducts a study in which, using several of its surveys, it takes all the taxation we pay - federal and state - and attempts to attribute it to different classes of household. It does the same for all federal and state government spending.

Of course, not all the taxes we pay can be attributed to households - company tax, for instance. Similarly, not all government spending can be attributed - spending on defence or roads, for instance.

In its latest study, for 2009-10, the ABS managed to attribute $194 billion, or 62 per cent, of total government revenue and $234 billion, or 51 per cent, of government spending.

Remember Shakespeare's seven stages of man? The study divides Australia's 9.8 million households into 10 main life-cycle stages. It turns out whether your household's a net payer or a net recipient depends heavily on where you are in the life cycle. We'll limit ourselves to six stages.

Most people start their working lives as single and under 35. On average, people in this category pay $226 a week in income tax and $115 a week in indirect taxes, such as the goods and services tax and the various excises.

They get back very little in cash benefits ($28 a week) and not a lot more in benefits in kind, $80 a week, mainly health care plus a bit of public spending on tertiary education.

So, on average, younger singles pay $233 a week more in taxes than they get back in benefits.

The next typical life stage is being young (under 35) and married, before the kids start coming. Households in this category - in which both partners are likely to be working - pay an average of $384 a week in income tax and $196 in other taxes.

They get back virtually nothing in cash benefits ($12), but $136 worth of benefits in kind, mainly healthcare and tertiary education.

So, on average, young childless couples pay no less than $432 a week more in taxes than they get back in benefits.

Once the kids start arriving, however, the tables turn. Somewhat older couples with dependent children, the eldest of which is aged between five and 14, pay more income tax ($454) and a bit more indirect tax at $227 (a sign of a more frugal life style).

Cash benefits jump to $133 a week (mainly family tax benefit) and benefits in kind leap to $608 a week (mainly school education, but also a lot more healthcare and a bit of childcare subsidy).

So, on average, couples with a kid or two get back $60 a week more than they put in. They think they're paying a lot of tax but, in truth, they're getting a net subsidy from other taxpayers.

Once the kids grow up, however, the tables turn again. Couples with non-dependent children average $604 a week in taxes. Against this, they get cash benefits of $176 and benefits in kind (overwhelmingly healthcare) of $328.

So older working couples revert to paying more in taxes than they get back, to the tune of $100 a week.

We've reached the last two stages of life: couples 65 and over, then single people 65 and over. On average, largely retired couples pay next to nothing in income tax and a bit in indirect taxes, totalling $168 a week. Against that, they get cash benefits of $378 (mainly the age pension) and benefits in kind (mainly healthcare) of $481.

So, on average, retired couples get back $691 a week more than they pay. For surviving single retirees it's a net gain of $475 a week.

See what all this proves? As well as redistributing income from rich to poor, the budget acts as a giant, multi-faceted mutual support scheme. At some points in your life you're a net contributor, at others a net recipient.

The system requires those without dependents to subsidise those with, particularly when the little blighters need educating. It requires the well to subsidise the sick. It requires those who work to subsidise those too old to work.

I think it's a good system, a sign we live in a reasonably caring, civilised society, where those in need get supported by the rest of us.

It's a reason we should pay our taxes with a lot less grumbling. The pity is, the system's so complex and convoluted it's not until you see a special study such as this that you realise how it works - it's inbuilt fairness and solidarity.

Something to think about next time you're tempted to justify a demand on government because you've "paid taxes all my life". You've also been benefiting all your life.

http://www.rossgittins.com/2012/10/budget-redistributes-income-over-life.html
 

Braveheart81

Will Genia (78)
Staff member
I like Gittins. He writes in a very straight forward and direct way. I think he offers something of value for everyone from the very financially literate to those with little or no financial knowledge.

He often gets criticised for being too much of a leftie however I think that is a bit unfair. Many commentors seem to take the stance that any economics writer who doesn't bemoan taxes as a socialist income redistribution tool must be a massive leftie.
 

mark_s

Chilla Wilson (44)
No, you can't offset capital losses against income tax. I would need capital gains to offset the losses.
 

Braveheart81

Will Genia (78)
Staff member
mark_s Are you talking about employee share scheme shares/options?

If they never crystallize into shares you can go back and amend the tax return where you originally included the discount received as assessable income and remove it.

Unless they crystallize into marketable shares and then become worthless, they should never give rise to a capital loss.

fatprop I was talking about employee share scheme options which I assumed mark_s was talking about.

Unless you control the family trust, I'd be asking for the cash from your taxable distributions :)

If you do control the unit trust/family trust, you're probably doing well enough that you can pay a bit of tax on money you haven't received :D
 

Gagger

Nick Farr-Jones (63)
Staff member
Try paying higher rate tax and then double GST - that's living in pomlandia for you
 

Gagger

Nick Farr-Jones (63)
Staff member
Ah, but you forget Pomgolia's big positive - it's nearer to other places! :confused:
 

Inside Shoulder

Nathan Sharpe (72)
Given the amount retired people take out why are the soon to be retired so severely limited in what they can deduct by way of superannuation contributions?
This will only add to the future burden: very short sighted of this government.
 

Braveheart81

Will Genia (78)
Staff member
Given the amount retired people take out why are the soon to be retired so severely limited in what they can deduct by way of superannuation contributions?
This will only add to the future burden: very short sighted of this government.

I agree. Most people maximize their super contributions when 50+ because they're closer to paying off their mortgage etc. Limiting deductible contributions for everyone to $25k makes it harder for people to boost their super balances to the necessary levels.

Whilst I accept that the tax concessions for wealthy people through superannuation are very substantial (certainly SMSF are the tax minimisation vehicle of choice now ahead of the family trust), perhaps some middle ground could have been found. If the second $25k was taxed at a rate of 30% then the taxpayer would still pay a decent rate of tax for that money but there would still be the incentive and benefit to make the full $50k deductible contribution.
 

mark_s

Chilla Wilson (44)
Wow, you really seem to know your stuff braveheart. I will explore you suggestions further.
 

Inside Shoulder

Nathan Sharpe (72)
I agree. Most people maximize their super contributions when 50+ because they're closer to paying off their mortgage etc. Limiting deductible contributions for everyone to $25k makes it harder for people to boost their super balances to the necessary levels.

Whilst I accept that the tax concessions for wealthy people through superannuation are very substantial (certainly SMSF are the tax minimisation vehicle of choice now ahead of the family trust), perhaps some middle ground could have been found. If the second $25k was taxed at a rate of 30% then the taxpayer would still pay a decent rate of tax for that money but there would still be the incentive and benefit to make the full $50k deductible contribution.
I agree with mark_s so I will confirm my ignorance and invite your comment: didn't the reasonable benefit limit (I hope that's what it was) try to keep a lid on loading up your super contributions in order to achieve present day deductions?
My understanding was that it was equally arbitrary but at least it reflected a partial solution to the problem.
Speaking only for me, if I retired at 65, I would, given my present super situation, be able to get on the government teat, with all the perks. I would like to avoid that but I pay enough tax that I'm not going to make contributions for which I get no benefit just to save them money in the future.
Im sure I'm not alone.


Sent from my iPad using Tapatalk
 

overthehill

Allen Oxlade (6)
Gittens is plain wrong. Money has not worked that way since 1971.

Australia has a sovereign fiat nonconvertible currency. The Federal government creates money by spending it into the private sector and cancels it by taxation.

The government does not operate like a household or private business that can't create its own money.
 

Scarfman

Knitter of the Scarf
I have a credit card. Isn't that creating money? I don't think your point is terribly relevant, though. Gittens is reflecting on tax and welfare at the household level. The guys in this thread point only the only negative in Gittens's description - if you are rich, and especially if you are rich without kids, you're going to pay more than you get back.

The rich to poor transfer is a fairly obvious one, and the basis of our society. The no-kids to kids transfer is less obvious. I think perhaps Howard and Costello went too far in this direction (and I say that as a father of 2).
 

overthehill

Allen Oxlade (6)
I have a credit card. Isn't that creating money? I don't think your point is terribly relevant, though. Gittens is reflecting on tax and welfare at the household level. The guys in this thread point only the only negative in Gittens's description - if you are rich, and especially if you are rich without kids, you're going to pay more than you get back.

The rich to poor transfer is a fairly obvious one, and the basis of our society. The no-kids to kids transfer is less obvious. I think perhaps Howard and Costello went too far in this direction (and I say that as a father of 2).

Your credit card is bank credit i.e. fake money created out of thin air (at interest) by a bank.

On the contrary. Our society works on the transfer of wealth from poor to rich via the financial system.

While money creation may not seem relevant to the minutiae of the tax system, when you understand the way money creation works it puts all the minutiae and argument into an entirely different light e.g. the rich to poor argument.

Taxes, in a fiat money system, don't actually "pay" for anything. The deficit, and all the hooha surrounding it, is just a number.
 

overthehill

Allen Oxlade (6)
Listening to all the argy-bargy over the budget update makes you think - what strange things budgets are. The government spends all this money - hundreds of billions a year - but where does it come from? From us, of course.

This is Gittens' starting point. And it's wrong, so the premise is wrong and the rest of the article compounds the error.
 

Braveheart81

Will Genia (78)
Staff member
I agree with mark_s so I will confirm my ignorance and invite your comment: didn't the reasonable benefit limit (I hope that's what it was) try to keep a lid on loading up your super contributions in order to achieve present day deductions?
My understanding was that it was equally arbitrary but at least it reflected a partial solution to the problem.
Speaking only for me, if I retired at 65, I would, given my present super situation, be able to get on the government teat, with all the perks. I would like to avoid that but I pay enough tax that I'm not going to make contributions for which I get no benefit just to save them money in the future.
Im sure I'm not alone.


Sent from my iPad using Tapatalk

RBLs were abolished in 2007. This was when taxpayers were offered the one off chance to put $1m into super (as a non-concessional contribution).

Under RBLs you were allowed to put larger concessional (deductible) contributions into your super each year and claim a deduction for the first $5,000 and then 75% of the remainder. This is for substantially self-employed people. Wage earners need to salary sacrifice and get their employers to make deductible contributions on their behalf.

The greatest concession available in superannuation is that once you are on a pension, income in your super fund is tax free. For wealthy people who manage to put a lot of money into their fund (you can put $150k non-concessional per year) it is a lot of money they are no longer paying tax on. A couple could put $3m into their SMSF over a period of 10 years and then once they are on a pension the income from those funds would be tax free. Prior to being on a pension these funds are only taxed at 15%.

Obviously it is a good thing for as much of the population to be self-funded in retirement as possible however the tax concessions which are effectively paid for by the rest of the tax base are massive.

This will definitely be the area of taxation targetted to improve government revenue in the next few years.
 
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