Effective average tax rates

An anonymous reader has sent me some interesting charts on average tax rates. The first shows the average income tax rate for a single person, taking into account the Medicare levy and the low income tax offset. The average tax rate rises with income as you’d expect but much more slowly than the marginal tax rates

The second takes into account the withdrawal of social security benefits, to compute an effective average tax rate, where the denominator is private income+maximum transfer payments and the numerator is tax paid+benefits withdrawn. The third does the same for a couple with one child. These average tax rates peak at a fortnightly income of about $500 for a single person and $1000 for a couple, and are otherwise fairly flat.

The pics are attached over the fold

Update Sorry, all that there are some problems with these pics. I’ll try and fix them ASAP.


17 thoughts on “Effective average tax rates

  1. Kinda scary the difference that the benefits make. An 80% EATR is ridiculous – further evidence that the ITAA needs to be placed in the nearest bin and a clean sheet approach started.

  2. I can’t see all of the second graph and nothing of the third. I can’t scroll down to see them. Is it just me?

  3. I could only see them by printing them out – looks like PrQ has disabled scrolling on the pop-up windows.

  4. Thanks for the tip, Andrew.

    John, those graphs just don’t look right. Any chance of you posting a link to the data?

  5. Ah, I see the reason. I wasn’t expecting the transfer payments to be included in the denominator.

    I’m still not sure that it makes sense that way.

  6. To illustrate:

    Mr Example makes (say) $40k p.a., and pays (say) $10k p.a. tax. Mrs Example doesn’t work. Average tax rate = 25%.

    Mrs Example gives birth to twins. Now they pay (say) $0 p.a. tax. I’d say that their average tax rate had fallen to zero, but the graphs would say it’s something like 70%.

  7. I suppose another way of defining the effective average rate for Mr & Mrs Example would be to say that after the birth of the twins, they still pay $10k in tax, but their income had risen to $50k, so their average tax rate had only fallen to 20%. I don’t like this definition much, but I suppose it’s arguable.

    I don’t think that the definition used for the graphs, where actual benefits are added to the denominator and potential benefits are subtracted from the numerator, provides much useful information. We already knew that the marginal rates were high for recipients of benefits, and this definition of average rates pretty closely tracks the marginal rates.

  8. Click select and drag to scroll down and across, like you are playing with your food. let’s see what PML makes of that.

  9. The first chart just shows the effective tax rate from nil at the $6000 threshold to about 35% at around $ 100,000, nothing new there.

    The other two graphs are an attempt to portray the supposed “effective marginal rates”. A term invented by the ‘revenue lobby’ (comprising the ATO, the Treasury and their allies in politics, academia, the media and the welfare industry) to hijack public debate by creating false impressions and perpetuating a campaign of vilification and obfuscation, effectively camouflaging the increasing real rate of taxation inflicted on the overburdened taxpayers of this country.

    Understandably sent anonymously by the ‘revenue lobby’.

  10. This is incorrect, because if you include benefits the EATR should be *negative* below about $500pw. It should be approach minus infinity as private income approaches zero. The formula for EATR is:
    (1- (disposable income/private income))
    Disposable income includes benefits.

    I might also add, as someone who has created an awful lot of EMTR schedules and budget constraints over the years, that there are a lot of interpretation issues with these, to do with what is and is not included (implicit subsidies to public housing? non-cash benefits? indirect taxes? etc), the choice of household types (should we be worried about incentives for rare household types? How does the pattern of incentives change household formation, as well as labour supply and savings, behaviour?) and with timing issues (Should we be concerned with people’s weekly cash flow position? Or just their full-year benefit/liability position? The two can be very different).

    Tread cautiously in drawing conclusions.

  11. DD, as noted, the EATR calculated for this graph has potential benefit income in the denominator, which ensures that rates can’t be negative.

    I agree that there are lot of different ways of defining and drawing these things, but I think the general pattern illustrated here is fairly robust. Still, as you say, it’s advisable to tread cautiously.

  12. Some of the comments above seem to be forgetting that these are EFFECTIVE ATR pictures, not average tax rate. The formula used by DD is not the one used here. In these charts the EATR is 1-(change in disposable income)/change in private income). It makes no sense to suggest an EATR would be negative where the EMTR is positive.

    I don’t understand Econowit’s point. How do the charts portray anything that hides the tax burden?

  13. The first chart shows the effective tax rate at a given income.

    The other two charts do not show tax rates. The charts try to amalgamate the tax system and the welfare system to produce incomprehensible confusion. (Hence JQ’s qualification: “there are a lot of different ways of defining and drawing these things”). There is no hard data on welfare supplied here or that is available else where, that can be effectively used to workout accurately what the supposed tax/welfare rate is. That is the way the ‘revenue lobby’ would like to keep it.
    This incomprehensible confusion is defined as ‘effective marginal tax rates’.

    By concentrating on ‘effective marginal tax rates’ (something that can not be quantified in reality) the revenue lobby confuse the tax system with the welfare system, skewing taxation debate away from the real issue of progressive taxation. Hidden behind progressive taxation is the rise in the effective tax rate of average earnings and the rise in income tax as a proportion of GDP (Australia ranks near the top in OECD countries).

    These deceptive rises in real tax rates occur over time and are a direct result of the scam called progressive taxation. As the government increases money supply and dilutes the currency, we need more of it to buy the same goods and services, then they swipe a bigger proportion of our income in tax. What makes this process more criminal is that for every dollar the government spends effectively it squirts one up against the wall. The government is a self regulating monopoly and they have legislated themselves a permanent pay rise- progressive taxation.

    In the end, any sense of fairness in a progressive system of taxation can only be arbitrary. The scam of progressive taxation should be abolished.

  14. Econwit – the figures used to produce the charts are readily available. They are this year’s income tax scales, and the rates of transfer payments as at March this year. These can be found on the ATO and Centrelink websites respectively. The method used to derive the numbers is as set out in my post just before yours. No mystery.

    As for this somehow hiding whatever evil may lurk in progressive taxation systems, I can’t see that either. One can look at changes in the average tax rate over time using constant dollars and see the effect you describe. But the same thing could occur if constant dollar comparisons were made of effective average tax rates through time, at least for those payments which are not fully indexed.

    This type of presentation doesn’t hide the issue with progressive tax that (I think) you are raising. It just includes a co-conspirator.

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