What does the rule say?
Basically the rule says that high income earners should be paying their fair share in taxes. In the Australian context this has been expressed as anyone earning above $300,000 should have a minimum average tax rate of 35% regardless of any deductions they may have.
Why is it called the Warren Buffet rule? Well it was proposed by legendary investor Warren Buffet who argued that legally the tax he paid was less than his secretary which seemed crazy and not right to him. He proposed this rule as a way of plugging a lot of loopholes at once.
This isn't actually as bad as it sounds
In Australia if you were earning $300,000 per annum and had no tax deductions you would be paying tax of approximately $117,000 which is about 39% and you would be in the top marginal tax bracket of 49% (including the medicare levy and the budget repair levy).
Now it doesn't sound like it would take a lot to get your tax rate down to 35%...but it actually isn't as bad as you think. For someone earning $300,000 their minimum tax payable would be $105,000. Under the current tax rates this means they would actually be getting taxed as if they were earning ~$276,000 which still gives you a hefty $24,000 in deductions.
But let's be honest...these measures aren't aimed at people earning $300,000. Let's look at someone earning $1 million. If they had no deductions they would be paying $460,000 in tax. The proposal says that they should pay $350,000. They are still allowed $224,000 in deductions before they hit the minimum barrier.
Aren't I disadvantaged by a proposal like this?
Honestly the reason I decided to write this piece was not because I think it is the right thing or policy (which I do) but it's because the people that need to speak in favour of proposals like this when it is a good idea are those that are earning high incomes.
Does it disadvantage me? Honestly...no. I pay my fair share in tax and I don't try and overly tax plan what I do. I don't skate close to the line and I just checked my last year's tax statement and I actually did pay 35% of my income in tax (even though I earn significantly less than $300,000). If I earn less than $300,000 and am paying 35% in tax....why is someone earning more than me entitled to pay less tax?
I'm not asking this question in a legal sense. Of course if you can legally avoid tax you should do so! That's the whole point of tax planning and I don't think tax planning is a bad thing. You shouldn't pay more tax than you have to.
BUT there are always going to be loopholes that people miss and that politicians don't want to fix for one reason or another. A blanket rule helps insure that people can still pay less tax and minimise their tax but not take the system for a ride.
Why do I like the rule so much?
Why do I like the Warren Buffet rule enough to break my 'no talking about politics' rule? Simply because it is neat, effective policy which is being slammed by those who have a very clear interest in keeping the system as it is.
Why is it neat? Well everyone is going to have some legitimate deductions and those legitimate reductions are probably going to increase as your income goes up (for a variety of reasons). The Warren Buffet rule doesn't get rid of deductions, in fact it doesn't really change the tax code at all.
Feel free to use all the deductions you want but there is a cap. There is a point at which you should still be contributing to the system and a point at which people who are earning significantly less income than you shouldn't be paying more tax than you.
If the rule is designed well you could have unused deductions carrying forward into future periods. Maybe a high income earner will never pay more than 35% and maybe that's where structuring takes us but at least they are still contributing to society and the system that we are all a part of.
Have I missed something?
Look I'm not claiming to have analysed this situation perfectly. Maybe I've missed something. Maybe there is something behind all the furor. Can you see something I haven't? Is there some reason why this isn't a good idea?
One reason I've seen touted is that high income individuals will just move overseas. I don't buy this argument. Tax rates are already lower in places like Hong Kong and the Middle East. If people were going to move for tax reasons they would have already done so,.
But is there something else? I would love to hear what you think!
You May Also Be Interested In
Certainly agree wholeheartedly with this one! An interesting thing that I found is Kerry Packers perspective on tax.. While I agree partially with Packer's stance that tax $'s are largely ineffective, I'll leave the comment there are there's faults on both sides of govt..
ReplyDeleteStill agree with the idea/concept though and don't see tax as being evil! :)
Oh I'm not going to go out there and defend the way that our tax dollars are spent. What I am calling for is equity though. If a middle income earner or even a moderately well off income earner is required to pay into the system to support the infrastructure that we all benefit from then there should not be loopholes only available to a select few.
DeleteI hope this proposal doesn't die like so many others have...perhaps I'm being too optimistic?
Hmm I do like the idea however what are your thoughts on using a model that uses crowd funding and isn't forcing people through taxes, which is probably where you get the push-back from middle to high income earners..
ReplyDeleteThis is a very raw and unformulated idea however not sure the current tax system works, it could require a different platform altogether.. Probably the best system we have at the moment though! :)