Gittins Exposes His Own Bulldust
Gittins effectively exposes his own caricature of those who argue for reductions in the highest marginal tax rates in today’s column. Reducing high marginal rates has never been primarily about inducing increased labour supply from high income earners. Indeed, Gittins is the only person who takes this straw man at all seriously. Lowering the top marginal tax rate has always been about removing costly distortions, a case he acknowledges in today’s column, albeit with the thinking done for him by ANZ chief economist Saul Eslake.
Regular readers will note that I have important differences with other reform advocates on this issue. In particular, I question the emphasis on removing concessions as the best way to lower rates, since this just leaves us with the same tax burden spread over a broader base. I would prefer the emphasis to be on funding lower rates through net reductions in government spending. But the general principle of seeking to align rates at lower levels is a sound one.
A closely related reason for lowering high marginal rates is eliminating the enormous waste of resources in tax planning, compliance and collection. Very few high income earners pay the top marginal rate, but only after they have devoted considerable resources to avoiding it. These resources all have opportunity costs attached. What struck me most about being a taxpayer in Singapore was not the low rates (welcome though they were), but how little it cost me to comply with the law: a few minutes of my time and a postage stamp each year, with no need for an accountant, much less a lawyer.
posted on 12 September 2005 by skirchner
in Economics
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Crikey has this tasty little tidbit in today’s newsletter. Just goes to show how the mega-rich *never* pay the 48.5% rate…
“5. How does the ANZ CEO get by on $43 a year?
By Stephen Mayne
Peter Costello says he’s against cutting the top marginal tax rate because of the political problems that come with giving millionaires a big break that would run into tens of thousands of dollars a year. But this overlooks the huge windfalls for millionaires which were delivered by the halving of the capital gains tax rate six years ago.
Take ANZ CEO John McFarlane. Last year he was on a base salary of $1.8 million – but he only took $43 of this in cash. That’s 82c a week, so there’s no danger of the cheery Scotsman breaking out of the tax free threshold based on his annual cash salary.
The rest of his salary was taken in the form of shares which, if held for more than 12 months, can then be taxed at half the top marginal tax rate of 47 per cent. With an overall salary package of $6.5 million last year, after equity based incentive payments on top of equity base pay, it would be very interesting to know how much of this went to Canberra.
McFarlane has been playing this game for years. Check out the ANZ’s recent August 9 announcement to the ASX, when he exercised another 500,000 options at about $16 but sold most of these at more than $21 a share, pocketing almost $10 million, about $2.5 million of which is clear profit.
That left the battling CEO with 1.819 million ordinary shares and options over a further 3 million ANZ shares – a total equity play of 4.819 million over stock which, at today’s price of $22.72, is worth $109.5 million. McFarlane’s gross profit on this play is estimated at about $40 million.
The tax reform debate which is raging right now should pick up the example of McFarlane and ask exactly how much he will receive from this and how much will go to Canberra. If he is able to shift the entire amount onto his CGT bill at 23.5% tax then it is an absolute scandal.
The Federal Government is being leached of hundreds of millions of dollars a year by this sort of aggressive tax planning which sees CEOs and the like taking huge proportions of their salaries in capital, rather than cash salary.
Remember all that moaning a couple of years ago about Australia’s tax laws making it difficult for expat CEOs to stay for more than five years? Well, John McFarlane is certainly showing the government how it’s done and might yet finish his contract in September 2007 as a member of the BRW Rich List.
Next time Peter Costello gets together with McFarlane and his Village Roadshow friends to watch a pre-release film, maybe they should have a bit of a chat about the way capital gains tax laws are being exploited. And the group of friends would collectively know plenty about salary tax planning, given that sacked Village director Peter Ziegler is suing the company for $148 million over some aggressive scheming which went wrong.”
Posted by .(JavaScript must be enabled to view this email address) on 09/12 at 03:13 PM