Home > Economics > Australia’s income tax rates

Australia’s income tax rates

June 25, 2012

Each year the government releases a budget that outlines our income tax system (among other things), and each year they hide the truth. Instead of simply reporting the marginal tax rates, the government reports three different sets of numbers (basic rates, medicare levy, LITO) and then leaves the reader none-the-wiser about how they interact to produce the actual income tax rates. The first time I publicly complained about this silliness was back in 2009.

In 2011 the government announced a series of changes to the income tax system as compensation for the impending carbon tax. At the time, I ran the numbers to show how they would change the actual tax rates.

Now that the 2012/13 Budget is out, it’s time to run the numbers again to strip away the magic and report the honest marginal tax rates faced by Australian workers. These numbers are quite similar to the numbers I reported last year, except for an increase in the threshold for the Medicare Levy. Last year I had pointed out that the Medicare Levy was going to kick in at a lower income than ordinary income tax starting in 2012-13… and it’s good to see that somebody in Treasury has noticed this problem and fixed it.

These were the actual marginal tax rates for 2011-12, which you won’t see reported anywhere else.

Actual marginal tax rates for 2011-12

$0 $16,000 0.0%
$16,000 $19,404 15.0%
$19,404 $22,808 25.0%
$22,808 $30,000 16.5%
$30,000 $37,000 20.5%
$37,000 $67,500 35.5%
$67,500 $80,000 31.5%
$80,000 $180,000 38.5%
$180,000 46.5%

At you can see, we had an absurd eight different tax brackets + the tax free threshold. Ever sillier is that the tax rates are regressive in two places, dropping from 25% to 16.5% at an income of $22,808 and also dropping from 35.5% down to 31.5% at an income of $67,500. The first anomaly is caused by the Medicare Levy (which is 10% for low-income earners) and the second anomaly is caused by the winding down of the low-income tax offset (LITO).

Below are the actual marginal tax rates for 2012-13, which you won’t see reported anywhere else.

Actual marginal tax rates for 2012-13

$0  – $20,542 0.0%
$20,542  – $24,167 29.0%
$24,167  – $37,000 20.5%
$37,000  – $66,666 35.5%
$66,666  – $80,000 34.0%
$80,000  – $180,000 38.5%
$180,000  – 46.5%

By coordinating some of the thresholds, the government has managed to reduce the number of different tax brackets to six + the tax free threshold. The two regressive steps stay in place, though they now kick in at $24,167 and $66,666 respectively.

Now that the government has pushed up the threshold for the Medicare Levy, the tax-free threshold (TFT) really will be $20,542 as they originally advertised. This is good news for those with very low incomes. Unfortunately, the tax rate kicks in at a significant 29%. While the higher TFT means that most workers will pay less tax, the marginal tax rates are actually higher for workers earning between $20,542 and $30,000… for people earning $24,000 their marginal rates have increased by 12.5% (from 16.5% up to 29%) and for people earning $28,000 their marginal rates have increased by 4% (from 16.5% to 20.5%).

Another group to see their marginal tax rate increase are those earning between $67,500 and $80,000, who will now pay an extra 2.5% (from 31.5% up to 34%)… though in a little quirk, people earning between $66,666 and $67,500 will actually see their marginal tax rate drop by 1.5% (from 35.5% to 34%).

The government has claimed — correctly — that the above changes will not increase anybody’s tax payments. However, the change in marginal tax rates are important, because it is the marginal rate (not the total tax paid) that determines work incentives and the efficiency cost of the tax. In particular, it would be great to see the government abolish the very high 29% tax bracket that applies to low-income earners. And if the government was looking for some more gratuitous advise, I suggest they consider combining the 35.5% bracket with the 34% bracket and the 38.5% bracket and perhaps making them all 35%… which would simplify the system down to just three tax brackets + the tax free threshold.

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  1. June 25, 2012 at 9:19 pm | #1

    Good job. I’m glad you’ve made this a regular review. I’ve lost track of how SATO and FTB interplay with EMTR. Any insights?

  2. June 26, 2012 at 11:15 am | #2

    Thanks you have crunched the numbers that clears up a lot of hokus pokus.

  3. MundiMundi
    July 3, 2012 at 10:34 pm | #3

    Nice job!
    Now we just have to factor in ftb a/b, parent pension/new start and rent assistance for typical situations (single/couple with/without kids). I doupt a regression that small matters once you factor in the loss of welfare payments, which send the emtr’s sky high, plus other work related expenses that are not tax deductible, such as travel to your job. That would probably be a much bigger factor on incentives.

    Also it’s worth noting that path withhold does not give all of lito, so the emtr over the short term (ie what people see in their pay) is even worse than what you have posted. It would be interesting to compare the marginal rate between incomes on the payg withholding tables.

  4. MundiMundi
    July 3, 2012 at 10:41 pm | #4

    Also, as another example of our absurd tax system for a person earning exactly $80k without private health insurance, there EMTR is technically a staggering 80,034%!

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