Sunday, 20 December 2009

78 cents in the dollar

Many people do not know the true extent of what we pay in taxes. This is hidden through value added taxes, hidden taxes (such as inflation) and morality taxes.

We think about the income tax we have to pay and commonly little more. Before Christmas, to help others truly understand what we are paying and hence what we are losing, I have completed an analysis of the total taxes that are assigned to each working person in Australia, this comes to 78cents in the dollar.

The values obtained to completed the calculations have been obtained from the following sources:

  • Australia. Income tax statistics,
  • ATO Tax statistics (e.g. Taxation Statistics 2003-04: A summary of tax returns for the 2003-04 income year and collections for the 2004-05 financial year at and for all years from 2001 to 2008)
  • Data and Statistics (The National on-line Statistical Database (NOSI), The National on-line Statistical Database (NOSI))
  • And the ABS (The Australian Bureau of Statistics -
This analysis has been completed by tabulating the following taxes;
  • Company taxes
  • Petroleum tax
  • GST (the main value added tax)
  • Inflation (this is a hidden tax and is averaged for the 2001-2009 financial years in these calculations)
  • Capital gains tax
  • Partnership and trust returns and tax
  • Fringe benefits tax and Luxury car tax
  • Payroll tax
  • Excise taxes
  • Morality taxes (WET, smoking etc)

In the 10 year period from 1995 to 2005, the total rate of taxation has increased by 15.4%. That is the bracket creep and imposition of a value added tax has in this period taken an additional 15.4% of the average wage earners total buying power. This has also expanded the government and allowed them to interfere with many more aspects of our lives and hence to limit personal freedom even more. Around 65.5% (+/- .2%) of this taxation is directly targeted at individuals. The remainder is through an indirect effect.

As the end recipients of lost investment through taxation are injured by this effect whether or not they see it, the effect is that they are directly taxed without knowledge. When all of these sums are calculated and assigned to the working population (and investors) the total amount of income to that which is consumed by the government (both directly and indirectly) can be calculated.

This comes to 77.83% or 78 cents in the dollar.

I have started this research for my next PhD studies. Once I complete my current research into the quantification of information systems risk (in 2011) I shall be starting a PhD on the effects and impact of legislation. This will incorporate a detailed statistical analysis the impact of government interaction, intervention and regulation on society.

It can be argued that morality taxes are a good thing (i.e in reducing smoking), but the facts do not support this assertion. The reality is that cigarettes are highly inelastic (as are most items covered by morality taxes). This allows the government to increase revenue at the expense of those who can generally least afford it while covering themselves in the umbrella of the "moral and ethical" high ground.

The end result is that more money is assigned to government. This both increases the spending power of the government (with its inherent inefficiencies) whilst also crowding out private expenditure. The end result of a morality tax is that those who smoke and drink continue to smoke and drink, but that they can also do little else (adding to their desire to smoke and drink).

As these members of the community have less disposable income that can be assigned to consumer goods, the purchase a lower quantity of consumer goods overall. This decreases the demand for consumer goods (other than that for alcohol and tobacco). As the demand is restricted on consumer goods, the supply of these goods also decreases in response.

The net effect of a policy that is designed to limit "morally objectionable" activities is that the "morally objectionable" activities may actually increase, while the production of consumer goods decreases. This has a flow on effect. As less consumer goods are produced, there is a lower requirement for all sectors of the economy that are associated with these goods.This creates a lagged recessionary effect. I am still completing the details, but I shall eventually publish this in its completion (this will be doctorate number 3). In this I hope to demonstrate that it is a heteroscedastically lagged impact of government that causes the recessionary effect that is generally assumed to be the natural state of a market economy.

Here we see government step into the aftermath of their own destruction. They bring in recovery polices and further restrict trade and commerce. They do however increase the size and power of the government on each occasion that they do this.

So, morality tax or socialist egalitarian expansionism. This is of course what Marx and Engels proposed in Das Capital and  is what even the so-called right manages to implement.


Andrew said...

I'd be very interested to see this more in-depth. What percentage is attributed to the different taxes?

Did you model this over one person or a group of people?

What's the PhD you are doing this research for, out of curiosity?

Morality taxes are interesting. Cigarette taxes I think don't have much of an effect on whether people buy them or not. The argument that I hear used is that the money is used for health care (since we have a part socialised system) smokers are unhealthy therefore cost the system more so it's fine to tax them this way. The pre-mixed drinks tax is a complete fallacy. The stated aim is to curve underage and young drinking. In fact what will happen, particularly with underagers where the excess money becomes an issue, is that they will turn to mixing spirits themselves. I think it's fairly obvious which is safer and preferred... Taxing the hell out of alcohol in general will end up with people turning to illicit substances. Actually, that's already happening to a very large degree.

Craig S Wright said...

I shall followup further later.

I am quantifying information systems risk. In this I have modeled financial statements and many other econometric areas (including taxes).

When I have a chance (Jan 2010) I shall post the data and calculations as a dataset.

Morality taxed items are generally inelastic. That is, if the cost increases, the demand does not diminish greatly. For this reason, taxing people who smoke results in the people with lower incomes losing a greater percentage of their income.

When I put the dataset up I will also include the confidence intervals and other summary data as well as the complete calculations and sources.