Of necessity, tax avoidance has become a key preoccupation for much of middle Australia

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.

We all know about the cash economy, and that many tradies (for example) will give a discount of up to about 20 per cent for cash.  Criminals, such as drug dealers, generally pay no income tax but may have issues with unexplained wealth.  The GST was supposed to hit the cash economy but, in reality it has had a very limited effect.  During the Howard government years, I recall asking our plumber (who always requested payment in cash) whether the GST would affect him.  He rubbed his hands together and replied "extra 10 per cent mate".

More importantly, small businesses also use a number of legal measures to reduce their tax.  Income splitting with family members (including a business partnership with a spouse or use of family trusts) to reduce income tax is common, and can save a lot of money.  Use of (lower taxed) fringe benefits is also not uncommon.  In recent years nominally commercial vehicles, like dual cab utilities, have soared in popularity because they can be used as multi-purpose family/business vehicles, and still be fully tax deductible.  Businesses in general also have some scope to time purchases and sales to smooth or reduce their taxable income, while instant asset write-off has proved a boon for those seeking to defer income tax liabilities.

Wage and salary earners have the least scope to minimise their tax and (relatively speaking) are "sitting ducks" for the taxman.  They are also generally less aware of the tax taken from them (because PAYE income tax is taken at source), whereas business owners generally pay their income tax in arrears out of their own bank accounts and are very aware of what tax they pay.

The main (widely-used) tax shelters open to wage and salary earners are owning their own home, and superannuation.  Australians invest heavily in home ownership, in part because the imputed rent they save through owner occupation is untaxed.  The family home is also exempt from capital gains tax and most land taxes, and is also generally excluded from assets tests on pensions and benefits.  Superannuation is also popular because it too is concessionally taxed.

Other popular tax efficient investments include shares providing franked dividends, capital growth assets (attracting concessional capital gains taxation), and negatively geared property (less common in these days of low interest rates).  Capital gains tax also can be deferred indefinitely, provided the taxpayer holds onto, rather than sells, the asset.

Even public servants these days have been facilitated in respect of tax minimisation due to salary packaging for senior executives (which often includes private-plated government-supplied vehicles, as well as generous superannuation).  Senior public servants also are often officially encouraged to use the services of tax planning advisors, such as McMillan Shakespeare Ltd.

Politicians (especially at federal level) are notorious for receiving generous untaxed travelling allowances (around $300 a night based on the cost of staying in a five star hotel), even though many reside in much cheaper flats (often shared), when staying in Canberra.  Federal politicians also receive electorate allowances of between $32,000 and $46,000 per annum, though they must keep receipts, and the unspent amount is treated as taxable income.  Politicians also benefit from generous retirement and termination provisions.

In many ways the Centrelink pension system is the flip-side of income taxation.  More than three-quarters of those aged 65 and older still receive a full or part age pension from the government, which is subject to income and assets tests.  Australians are notorious for going to great lengths to keep themselves eligible for the pension and related benefits.  It is generally the case that the upper middle classes, unless they squander or otherwise dispose of their income and assets, will not quality for the pension.

The real cause of high levels of income taxation and rising public debt is the inexorable rise in government spending, and that taxpayers fail to realise that they themselves will be the eventual payers for the "free" stuff supplied by government.  Put simply, people fail to realise that higher government spending means that they will have less of their own money to spend themselves, especially if they have high taxable incomes.  Also, since the end of the Howard era, there seems to be no political appetite for cutting government spending.

Recent years have seen panicked spending on COVID, soaring spending on things like child care (heavily benefiting dual income middle-class families), and out-of-control spending on the (unfunded) NDIS, to name but a few.  Poor spending programmes are always difficult to reverse, and, during the recent COVID induced spending binge, all sorts of additional spending was slipped into Government budgets, largely unnoticed.

A lot of public attention has been focussed on inappropriate pork barrels, such as the "sports rorts" and "suburban car parks rorts".  While such abuses are rightly condemned, they generally are only low ticket items compared to the billions lavished on Jobkeeper and expenditures like dud defence acquisitions (e.g. French diesel submarines, overpriced underperforming frigates, helicopters not fit for purpose) or infrastructure that is not cost effective (e.g. Inland Rail project).

Given the need to reduce the size of both the Commonwealth and State budget deficits (all currently very substantial), there seems to be no reasonable prospect of income tax relief beyond that already announced.  Given that Australia is surrounded by sea, one would think that collecting taxes on spending would be less problematic than in (for example) European countries with multiple land borders.

While broadening the tax base might seem like a good idea, there is a real risk that the additional revenue would simply be used to fund further spending instead of for reducing income taxation.  The same is true for more controversial measures such as reintroducing inheritance taxes, and taxing the family home.

Stage Three tax cuts scheduled from the 2024–25 income year (if implemented) will provide further tax cuts by abolishing the 37 per cent marginal tax rate entirely and lowering the 32.5 per cent marginal tax rate to 30 per cent.  The marginal tax rate on all taxable income between $45,000 and $200,000 is scheduled to be 30 per cent.

The rub is that there is going to be a huge step increase in the marginal tax rate at $200,000.  Instead of the effective rate moving from 39 to 47 cents (including Medicare Levy), the new transition will now be from (the lowered) 32 cents rate to the (unchanged) 47 cents top rate.  Rising inflation will also push ever more taxpayers into this bracket.

If we are honest about it, most people on decent incomes are tax dodgers to one degree or another, though they may not admit to it.  The degree of deliberate tax planning does vary widely between individuals, and those on middle incomes and above, who pay insufficient attention to managing their tax affairs, end up costing themselves not inconsiderable sums.  Many taxpayers, when they invest in a home or in extra superannuation may not be entirely conscious that they are engaging in forms of (legal) tax avoidance, which is (in part) what they are doing.

Like politics, people have differing views about tax.  Those that are self-serving believe that "other people" should pay more ("their fair share" of tax).  Making billionaires pay more tax is always popular rhetoric.  It is a plan that, however, never seems to deliver, because there are not enough billionaires.