Sunday, May 12, 2013

Not rich? Why we've no idea what we actually earn

Michael was outraged. Earlier in the week I had written that anyone earning more than $210,100 a year was ultra-rich, in the top 1 per cent.

“How exactly does one draw the conclusion that earning $210k a year makes you ultra-rich, especially as I am assuming this is before tax?” he asked.

“This equates to approximately $140k net after tax as income.”

“Assuming a $600k mortgage (appropriate to this level of income) and two children in private schools plus additional outgoings this leaves a balance of only $21k for holidays and other incidentals and/or saving.”

I wrote back assuring him that, however difficult his circumstances, 99 per cent of Australians earned less than he did in 2010-11, the most recent year for which the Tax Office has figures.

Compared to them he was indeed income-rich.

Most of us seem to know next to nothing how we are really doing compared to everyone else.

Here is a test. What do you think was the average income reported to the Tax Office in 2010-11?

I’ll make it easier. You can exclude all the (mainly) low earners who don’t pay tax.

The average income earned by the Australians who did pay tax was $66,720.

If it seems as if almost everyone you know earns more than that, that could be because you don’t get out enough.

Labor MP for the Hunter Joel Fitzgibbon doesn’t get out enough. He infamously claimed a few weeks back that families on $250,000 were ''struggling''.

''Coal miners in my electorate earning $100,000 $120,000 $130,000, 140,000 a year are not wealthy,” he said.

In fact the same Tax Office statistics show the average income for the postcodes in his electorate centres around $60,000 - way below those of the people he mixes with.

And those averages hugely overstate what most people actually earn.

Astoundingly, roughly three quarters of Australian taxpayers earn less than the average. That’s less than the average. Only one quarter earns more.

The true midpoint, the income above which half of us make more and below which half make less, is $45,212.

Why do most of us take home so much less than the average? Because the average is an artifact - it is pushed up by a few truly enormous incomes at the very top.

(Think for a minute about Gina Rinehart, the world’s richest woman. Her income boosts our average income but not our typical income. If she moved overseas our recorded average income would slide but our typical income would not.)

It’s actually not that fair to single out Joel or John. None of us get out enough.

We tend to live near people who earn something near what we are earning. If they earn slightly more than us we think we’re behind. If they earn slightly less we think we’re ahead. But we don’t look far beyond them.

It’s not only that we live in suburbs where people tend to earn the same as each other. The average income in Rushcutters Bay is $203,270. The average at Ruse in Campbelltown is $46,700. It’s also that Sydney’s high-income suburbs are clustered together. Near the city and harbour are Sydney’s high earning suburbs. Further away in the south and west are the low-income ones. Those of us who live near the centre don’t even need to drive through the further flung suburbs to get to work.

In the United States it is often the other way around. The low-income suburbs are near the city, meaning that high-income Americans at least need to drive past them as they go in to town.

At work we are also likely to be closest to the people who earn the sort of wage that we do.

Surgeons earn an average of $341,600 according to the Tax Office. They associate with other surgeons. Hairdressers earn an average of just $27,600 (many are part time). They too hang around with other hairdressers.

They are also increasingly likely to marry each other. The Productivity Commission reported this year that two-thirds of Australia’s high earners were married to other high earners. A decade earlier the proportion was 50 per cent.

It’s even worse when you consider aspirations. Believing we might one day move up a notch or two we are keen to defend the interests of those above us. The shadow treasurer Joe Hockey nailed it two years ago when he attacked a budget measure with the potential to hurt very high earners.

“$150,000 a year for a family is certainly not rich Australia,” he said. “Besides I want people to aspire to earn $150,000 or more.”

That’s the problem. We think others earn more than they do, we aspire to earn more than we do, and many of us have no idea how well off we are.

In today's Canberra Times and Sydney Morning Herald

Related Posts

. Earn $210,000? You're in the top 1 per cent

. Our rich are getting richer

. Negatively geared. Our landlords lose $13.2 billion, mostly on purpose