An average male (working full time) currently earns $1934.80 a week or $100,610 per annum, and pays a marginal income tax rate of 32.5 cents plus 2 cents Medicare Levy. This 34.5 cents effective marginal tax rate in itself does not seem too onerous. The problem is that it rises to 39 cents at just $120,000, and to an effective 47 cents at incomes of just $180,001 (only 19 per cent and 79 per cent respectively above average male full time pay).
The issue is that a 47 per cent effective marginal tax rate, at less than double the average wage, does not provide much incentive to work more or to work harder at the margin, and much the same can be said about the 43 per cent tax rate that applies from only 19 per cent above average male earnings. Many hard-working people seeking to establish themselves by working long hours are now in the higher tax brackets. In addition, bracket creep has ensured that an ever rising proportion of taxpayers are entering these ranges.
Overall, it is believed that 50 per cent of all income tax in Australia is paid by 10 per cent of the working population (mainly our middle to upper middle class, with significant numbers being blue collar). Only 43 per cent of the adult population (excluding public sector workers) are net taxpayers, when government payments are taken into consideration, while about 85 per cent of single-parent households pay no net tax.
The disproportionate burden on middle Australia is particularly significant because taxes on income dominate taxation collections in Australia, comprising about 60 per cent of total revenue for all levels of government combined.
The reason for such unevenness is Australia's very generous tax-free threshold coupled with marginal tax rates that rapidly escalate when incomes pass modest levels. The burden on the middle classes is even bigger than the tax statistics show. This is because those paying higher income taxes are excluded from many benefits. They also disproportionately fund much of their own family health and education expenses, and invariably are responsible for paying their own housing costs.
Comparing Australia and New Zealand, NZ has no tax free threshold, and a 10.5 per cent tax rate applies to the first $14,000 of income, while their top rate of tax is only 39 cents in the dollar.
So how do Australians cope with our progressive income tax and welfare regime?
Income tax rates and income testing of welfare provide a big incentive, especially for those of low earning capacity or with dependents, to work part-time or not at all. Progressive income tax rates (in addition to parental care obligations) are a big influence promoting Australia's high rate of female part time employment, and also mean that tertiary students pay relatively little income tax when they work part time or during holidays. In contrast, former students (after they leave education), get whacked not only with higher income tax but with significant HECS/HELP repayments as well.
There has been income tax relief in recent Budgets, with more planned. A big issue is that the relief has been focussed on low to middle income earners, with no plans to lower the top marginal rate.
Middle and high income earners for decades now have looked for ways to avoid high marginal tax rates, if they can. Those with a good education and those with wealth have much greater capacity to engage in legal tax avoidance. Managing tax affairs takes up a large amount of time and money, especially for those in business, and is a big part of the revenues of the accounting and legal professions.
The super rich, while they may seem to pay a lot of tax in absolute terms, can look after themselves. Besides having access to an army of accountants and tax advisers, much of their wealth is held in corporate form. In Australia the general company income tax rate is 30 per cent (with dividends subject to franking credits) compared with the top personal tax rate of 47 per cent. The very rich can also benefit from concessions within the company tax system, and may also use overseas tax havens.
For more modest businesses, the small business company tax rate for 2021-22 is now a modest 25 per cent. There has always been a strong incentive for small business to adopt a corporate rather than a sole trader structure, and recent reductions in company tax have increased this. In addition, small and medium sized businesses have other ways to minimise their tax.
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