Misleading income tax scales
Every time the budget comes out, we get little spreadsheets showing how much different kinds of households get in tax cuts. Something that struck me about last night’s budget was the fact that people on $30 000 got a smaller cut than people on $25 000. As far as I can see, no one has commented on this (feel free to point out exceptions) but on the face of it, there’s a puzzle here. As Costello said last night, if you cut the marginal rate on low incomes, (or raise the threshold), everybody gets the cut. So unless a rate is raised somewhere, people on higher incomes always get at least as big a cut as those on lower incomes.
The answer turns out to be something called the low income tax offset, which has been around for a while, as this factsheet from 2003 shows. As the name implies, low income earners* get an offset against their tax, but this is phased out as incomes rise from $20 000 a year to $30 000 (with this budget the phaseout starts at $25000 and runs to $40000).
Effectively, this is much the same as raising the threshold at which tax is paid (to around $9000, compared to the officially published $6000) and increasing the marginal rate on incomes between $25 000 and $40 000. I haven’t checked out how much, but I estimate it’s equivalent to around 2.5 percentage points, raising the effective marginal tax rate from 30 per cent to 32.5 per cent.
So, where the official tax scale suggest that low and middle income earners face the same threshold and lower marginal rates, the truth appears to be pretty much the opposite. It’s an open question as to which is better, but it would certainly be good for the tax scales to reflect reality instead of obscuring it.
*Another group of beneficiaries, far from low-income, are the children of those (probably including quite a few Cabinet ministers) who dodge tax through family trusts. The offset raises the threshold at which the income nominally assigned to them becomes taxable.