Tuesday, July 04, 2006

Inequalities of a tiered tax system

Tax return time always tends to refocus ones mind on the taxation system and its implications.  One that crystallized quite clearly for me this tax period was how the tiered tax system actually conspires against the poor to keep them in their place.

It is a counter-intuitive point but as one moves through the levels of the taxation system it becomes easier to do the "right" things with your money, investing more and delaying consumption, thus escalating the rate of wealth growth.  In addition you are better off doing the right thing by way of insurance etc so that the downside risks are also covered better than in a poorer household.

To demonstrate the partial point I will use the case of income protection insurance - something that most households know that they should have to some level, and yet those at most risk of the consequences tend not to have.
This is due to two compounding factors:
a) the cost of a given level of protection is higher for a low income worker
b) the level of Government subsidy is higher for a high income worker

The first is an understandable effect of the risk to the insurance company - but as long as the level of insurance is less than 80% of the original income actually tends not to be overly significant in the final calculation.  In a specific instance where I earn double what someone else does, but we have the same level of insurance cover the premiums only differ by 15%.  Most of that difference is due to them being a smoker - not the income disparity...

However where the big difference comes is that I can claim 39% (actually 51.5% - but I'll ignore the effects of GST registration for now) of my premium back from the Government.  My specific comparison can only claim 19% of their policy back.

And so the Government through a tiered tax system acts to encourage those low risk individuals to partake in behaviors beneficial to themselves; while those high risk individuals are left to cope with their bad habits on their own.

Can you define a single behavioral encouragement within a tiered tax system that actually encourages low wealth / income families into those behaviors that will ultimately benefit them?
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