If you're familiar with the tale of Robin Hood, who stole from the Rich and gave to the Poor, then you are no stranger to the concept of redistribution of income. This is essentially what government's do with tax (not 'stealing' exactly - although it depends on who you speak to).
Societies in general rely on their Governments to provide services which won't or can't be paid for by the private sector (business and consumers), such as Defence and Infrastructure, and to make sure that those in society who are most needy (often the low income earners, sick and elderly) are provided for.
It's hard to argue against the logic of this redistribution, so why are people so opposed to paying tax? Two possible theories are that (1) people don't generally understand how tax works and (2) people don't agree with how tax revenue is spent.
How does tax work?
Australia has an income tax system that is progressive. This means that Individuals pay tax at marginal rates (as opposed to an average rate or a flat tax). If you earned $18,200 in 2017, you wouldn't have paid any tax. But if your income was $37,000 you would have paid 21% (including 2% Medicare levy) on the income you earned between $37,000 and $18,200. The rates are progressively higher as you earn more income.
Similarly, when you claim a deduction in your tax return, you save tax at your marginal tax rate. So if you are in the $87,000-$180,000 bracket, paying tax at 39% (including 2% Medicare levy) and you want to claim $1000 of deductions, you will get a refund of tax, equal to 39% of $1000 (ie $390). The same $1000 claimed by someone in the $18,201-$37,000 bracket would only get a tax refund of 21% (ie $210).
Why does the Government let taxpayers claim deductions? Think of how a business is taxed. The business doesn't pay tax on the income they earn; they pay tax on their profit after accounting for all their business expenses. The same logic applies to an individual's income. The expenses you incur in order to derive your income reduce your overall "profit". You therefore are taxed on the assessable income (e.g. salary, interest, dividends etc) minus deductions (car expenses, mobile phone, travel etc), which is your taxable income.
How is tax revenue spent?
According to the 2017-18 Federal Budget papers, more than 35% of budgeted government spending will be allocated to social security and welfare. There is a common misconception that a large portion of people's tax dollars are being given to fund people's unemployment. This isn't actually true. The majority of spending on social security and welfare is going to the elderly, followed by people with disabilities and then families with children. About 6% of social security spending goes toward unemployment benefits. That is about 2.16% of total non-capital expenditure.
The second largest expense in the budget is healthcare. Pretty much everyone in Australia uses some form of health service each year. In Australia we have a system that is close to "universal" healthcare. In other words, almost free health care for everyone that needs it. It ensures that even people who don't earn enough to pay tax can still have access to free or affordable health care.
Education makes up 7.28% of Government spending, and some might argue that it's not enough. It's important to note that in addition to the federal expenditure, Schools and Tertiary institutions (TAFE and universities) receive funding from State Governments which is approximately equal to 13% of total Government spending (this funding falls under the Revenue to States category, but the tax doesn't come from your earnings, it is funded by the GST - which you pay as a consumer - so technically it is still your tax dollar).
Tax Receipts from ATO
Since 2015-16 financial year, the ATO has been issuing Tax Receipts that accompany an individual's Notice of Assessment to most taxpayers. It is designed to show you exactly where your tax is being spent, which is a handy document to look over when you feel like you're paying too much tax.
If you want to understand more about our tax system and government spending, send me an email! I would be happy to clarify any of the points above. I'm going to end this blog entry with a joke. Accountants love jokes, especially accounting jokes. Please note, it is a very simplified example of a tax system based overseas, but it seems appropriate for this blog post :)
The Tax System Explained In Beer
Suppose that every day, ten men go out for beer and the bill for all ten
comes to $100.
If they paid their bill the way we pay our taxes, it would go something like
The first four men (the poorest) would pay nothing
The fifth would pay $1
The sixth would pay $3
The seventh would pay $7
The eighth would pay $12
The ninth would pay $18
The tenth man (the richest) would pay $59
So, that’s what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the
arrangement, until one day, the owner threw them a curve ball. “Since you
are all such good customers,” he said, “I’m going to reduce the cost of your
daily beer by $20”. Drinks for the ten men would now cost just $80.
The group still wanted to pay their bill the way we pay our taxes. So the
first four men were unaffected. They would still drink for free. But what
about the other six men ? How could they divide the $20 windfall so that
everyone would get his fair share?
They realized that $20 divided by six is $3.33. But if they subtracted that
from everybody’s share, then the fifth man and the sixth man would each end
up being paid to drink his beer.
So, the bar owner suggested that it would be fair to reduce each man’s bill
by a h higher percentage the poorer he was, to follow the principle of the
tax system they had been using, and he proceeded to work out the amounts he
suggested that each should now pay.
And so the fifth man, like the first four, now paid nothing (100% saving).
The sixth now paid $2 instead of $3 (33% saving).
The seventh now paid $5 instead of $7 (28% saving).
The eighth now paid $9 instead of $12 (25% saving).
The ninth now paid $14 instead of $18 (22% saving).
The tenth now paid $49 instead of $59 (16% saving).
Each of the six was better off than before. And the first four continued to
drink for free. But, once outside the bar, the men began to compare their
“I only got a dollar out of the $20 saving,” declared the sixth man. He
pointed to the tenth man,”but he got $10!”
“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar too.
It’s unfair that he got ten times more benefit than me!”
“That’s true!” shouted the seventh man. “Why should he get $10 back, when I
got only $2? The wealthy get all the breaks!”
“Wait a minute,” yelled the first four men in unison, “we didn’t get
anything at all. This new tax system exploits the poor!”
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn’t show up for drinks so the nine sat down
and had their beers without him. But when it came time to pay the bill, they
discovered something important. They didn’t have enough money between all of
them for even half of the bill!
And that, boys and girls, journalists and government ministers, is how our
tax system works. The people who already pay the highest taxes will
naturally get the most benefit from a tax reduction. Tax them too much,
attack them for being wealthy, and they just may not show up anymore. In
fact, they might start drinking overseas, where the atmosphere is somewhat