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.
The primary way that taxes hurt the economy is by changing people’s incentives at the margin. Each small change in taxes may not seem like a big deal to any one person, and for many people it won’t change their behaviour, but it is possible to measure the change in behaviour and assess the economic consequences through statistical analysis. The economic cost caused by changed behaviour from taxes is called the “deadweight loss” and has been estimated at anywhere between 20% and 40% (depending on the study and depending on the tax). That means that for every $100 in tax raised, the economy shrinks by $20 to $40. So for a levy of $1.8 billion the deadweight loss costs are likely to be in the order of $0.4 to $0.7 billion.
Finally, the night we’ve all been waiting for. Forget Christmas or New Years… it is Budget night that all red-blooded Australians look forward to every year, sitting down with family and friends with a bottle of single-malt and a bag of popcorn and eagerly anticipating the annual throwing of the pork.
But this year was a non-event. Even economists got bored. One eager politics-watcher walked out on our live-blogging last night to go and get KFC.
The short version
* Budget deficit for 2010/11 is $40.8 billion (2.9% of GDP) — which is about $2000 for every man, woman and child. The budget is projected to return to surplus in 2012/13. This has been achieved by an increase in revenue (including the $9 billion/year mining tax), not by a reduction in spending.