Warren Hogan, an industry professor at UTS Sydney and former ANZ chief economist, believes that Australia should create an ultra high-income tax bracket and reduce marginal tax rates for those on below-average incomes to reduce income inequality and economic growth:
…an important contrast between now and the successful growth-driven recovery after World War Two is inequality in income and wealth. Since the Reagan-Thatcher years, inequality has been rising across the advanced economies. And income inequality is a particularly strong headwind to economic growth.
The world is facing an excess of savings. Inequality drives higher saving at the expense of spending because those on high incomes have a much greater propensity to save an extra dollar of income rather than to spend it…
A more even distribution of income will promote a higher level of consumption and overall economic activity…
A starting point might be to consider an ultra high-income tax bracket…
In the 1950s and 1960s, the top marginal tax rates in advanced economies were mostly between 60 per cent and 80 per cent. The government should consider a 65 per cent marginal tax rate for those that earn more than eight times the average wage.
Marginal taxes rates for those below the average income need to be cut.
Warren Hogan’s arguments are impeccable both on economic and social grounds.
Lower income earners have a far higher marginal propensity to consume, meaning any boost in their disposable income via tax cuts (paid for by ‘soaking the rich’) will lead to significantly higher spending in the economy, boosting growth.
These arguments also highlight why the Morrison Government’s planned tax cuts for higher income earners are a bad idea, since they will significantly increase the budget deficit while not materially lifting spending (demand), since most of the additional disposable income will be banked.