Duncan Storrar is right, ScoMo is wrong — money does mean more to the poor

Treasurer Scott Morrison believes in you. Here’s what he said in delivering the budget:

“[W]herever possible we prefer to leave a dollar in Australians’ pockets than take it for the government’s pocket, because we know that it is money in your pocket that can help you and your family most.”

It’s a weird thing for the nation’s chief tax-taker to say. On one hand he takes 25% of GDP in tax, but on the other hand he reckons that’s bad?

If you take his argument to its extreme you have no justification for funding the federal government at all. The problem is he’s making that same statement to all of us, rich and poor alike.

While I can see the case for leaving those last few dollars in the hands of a cash-strapped family of six, I can’t quite see the same case when it comes to a double-income couple like Malcolm and Lucy Turnbull.

Marginal utility of money

Part of the basis of our progressive tax system is that a person has a declining marginal utility of money. With our first $20,000 a year we meet very basic needs. Our next $20,000 goes on things less basic. This goes on and on until the difference between making $280,000 and $300,000 a year is barely noticeable.

The government knows by this stage you’ll just be buying a different brand of truffle oil and maybe a second gardener with that marginal 20 grand, and says OK, Society can probably think of better things to do with that money. Let’s have 47% of it.

The question posed on ABC TV on Monday night by Duncan Storrar — a man with a disability who has worked on minimum wage and is now a flashpoint in the election campaign — relates directly to this concept.

“If you lift my tax-free threshold, that changes my life. I get to say to my little girls, ‘Daddy’s not broke this weekend, we can go to the pictures’,” he told Assistant Treasurer Kelly O’Dwyer. “Rich people don’t even notice.”

We have estimates of the marginal utility of money from the Australian Unity Well-being Index. A little goes a long way when household income is low. The same boost requires a lot more money once you’re richer.

In fact, above a certain level, some household members seem to experience a reversal in well-being.

But if all government were doing was shuffling money from rich people with low marginal benefit of money to poorer people with higher marginal benefit, we’d probably have far more transfers than we do, and probably approach a far more equal set of outcomes.

There is more at play.

Incentives

The budget again spells it out. “Australians understand that our outdated tax system is punishing hard work, hindering growth, limiting opportunity and hampering innovation,” it said.

There is a clear case for allowing some people to be paid more than others. Willful blindness to the importance of incentives has tripped up economic systems in the past.

But again, it is not clear what motivates us to get ahead is the sheer volume of reward so much as the positional good of having a bit more money and status than our friends and rivals. As wages rise and the economy expands, we haven’t seen people work more and more; quite the reverse.

This suggests even tax-transfer systems with plenty of redistribution can still leave room for an incentive for “working hard and getting ahead”.

Encouraging hard work is not the only kind of incentive in the tax system. There are also incentives for tax dodging. I still remember the disappointment I felt when I heard Pat Rafter, Australian tennis champion, was resident in Bermuda for tax purposes.

Cutting tax to avoid tax dodging seems to have things backwards, however. A truly sophisticated analysis of all the incentives would admit a major OECD country cutting taxes to eliminate tax avoidance is only likely to make other jurisdictions do the same and leave us, at some future point, with a similar tax rate differential.

Nevertheless, keeping taxpayers onshore is, on balance, something of a justification for Scott leaving earnings in our pockets.

Mending the net

Remember Duncan from Q&A? After he asked his very pointy question, The Australian newspaper pointed out he pays “no net tax”. The amount he gets in cash transfers, they revealed, is larger than the tax he pays.

This “gotcha” depends on a pretty narrow idea of the benefits of government. We all benefit from roads, hospitals, defence, etc.  On average, Australians get back what we pay for. Poorer people get more in income support, but richer people get benefits, too.

You could argue those relying on our well-governed market system to make hundreds of thousands a year and protect their investments are getting as much from government as poor old Duncan — perhaps even more.

Not to mention the benefits they get from living in a relatively equal society. We may well ask who gets benefits from social welfare. Is it only the person on the receiving end of the cheque? Or are we all benefited? Any reduction in suffering, poverty, disease and crime could be seen as an upside — direct or indirect — to all of us.

In any case, ScoMo’s argument that a dollar in the government’s pocket is less valuable than one in your pocket is too simple. It depends whose pockets he is referring to and what the government does with it.