The Budget, Part 2
Following up on the Budget, I’ve been looking at the incidence of income tax over the Howard-Costello period. To start with, I’ve just looked at the tax scales, disregarding deductions, avoidance and evasion, and confining attention to single taxpayers. The results are perhaps not surprising, but certainly disturbing
Single taxpayers on average weekly ordinary time earnings faced an average income tax rate of 22.8 per cent in 1996, and that will be pretty much unchanged at 22.2 per cent when the second stage of the Budget tax cuts are phased in in 2006. Since the GST has come in in the meantime, raising more revenue than the indirect taxes it replaced, we can conclude the tax rate for this group has risen. Also, since the mean exceeds the median, this means most single wage- earners are paying more tax than they did in 1996.
The effect is stronger ot 0.6 times AWOTE, where the average income tax rate has risen from 15.4 per cent to 16.9 per cent. On the other hand, for those on 1.5 times AWOTE, the average rate has fallen from 29.4 per cent to 26.2 per cent, and for those on twice AWOTE, from 33.8 per cent to 30.1 per cent.
Since someone is bound to jump in and point out that this is still a progressive system, let’s remember that the income tax is just about the only progressive element of the system. Except for the bottom 20 per cent, the tax system as a whole was roughly proportional before the latest changes, and is likely to become increasingly regressive if policy continues along these lines.
Andrew Leigh has a different way of looking at the numbers, but reaches much the same conclusion.