May 13, 2016

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

A little goes a long way when household income is low. The same boost requires a lot more money once you’re richer.

Jason Murphy — Journalist and economist

Jason Murphy

Journalist and economist

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.

J Murph household income graph

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

J Murph gender wellbeing graph

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