Taxes, nine years on

About nine years ago, during the last days of the first Rudd government, the Henry Tax review came out and I did a blog post about it. Their recommendations were:

  • tax free threshold of $25,000
  • marginal rate of 35% between $25,000 and $180,000
  • marginal rate of 45% above $180,000
  • drop the Medicare levy, low income tax offset, etc
  • introduce a standard deduction to simplify tax returns

(Given inflation, those numbers should probably be $30,000 and $220,000 today)

The only one of those recommendations the Rudd/Gillard govt’s managed to implement was the increase in the tax free threshold from $6000 to $18,200, accompanied by compensating marginal rate increases from 15% to 19% and 30% to 32.5%.

What we’ve got in the budget now is a step closer to the Henry review’s recommendations:

  • tax free threshold remains at $18,000
  • marginal rate of 19% up to $45,000 (in 2022) instead of $37,000
  • marginal rate of 30% up to $200,000 (in 2024) instead of 32.5% to $120,000 (in 2022) or $90,000 (nowish)
  • marginal rate of 37% dropped (in 2024)
  • top marginal rate of 45% retained
  • low income tax offset is retained and increased (and remains regressive, as the marginal tax rate under $66k is larger than the marginal tax rate over $67k due to the offset phasing out as income increases)
  • temporary low-and-middle income tax offset introduced to stage in the change to the 19% marginal rate
  • medicare levy retained at 2% rather than increased to 2.5%

Most of that’s from last year’s budget, which looks like it passed despite opposition from the ALP, the Greens and independents Tim Storer, Andrew Wilkie and Cathy McGowan. This year’s budget just changes the 19% bracket’s cutoff from $41,000 to $45,000, increases the LITO, and drops the 32.5% bracket to 30%.

That’s still a bit worse than the Henry review’s recommendations from almost a decade ago: the 19% marginal rate should and the low-income tax offset should both be dropped, with the tax free threshold raised to compensate for both of those, and the medicare levy should be rolled into remaining rates, increasing them to 32% and 47%. But still, it’ll be the first reduction in the number of tax brackets since 1990, which isn’t nothing.

Despite the Henry review having been a Labor initiative, Labor’s plan seems to be to do the opposite, and re-legislate the 37% tax rate back in so that we won’t have to have “a cleaner [..] pay the same tax rate as a CEO”. Shorten’s explicit example of a nurse on $40,000 and a doctor on $200,000 paying the same rate doesn’t actually work; the nurse’s marginal rate drops to 19% even under existing law before the doctor’s marginal rate drops from 45% to 30%. Comparing marginal rates at wildly different incomes is absurd, however; and the Henry report addressed this concern directly, noting that a large tax free threshold and a flat marginal rate already achieves progressivity, so that, eg, a cleaner on $50,000 pa pays $6630 (13.3%) tax while the CEO on $150,000 pays $36,630 (24.4%) tax, despite both being on the same 30% marginal rate. This doesn’t seem to just be election sloganeering by Shorten, but an ongoing lack of understanding; O’Neill made a similar claim in the parliamentary debate last year, sayingLet’s be absolutely clear here: stages 2 and 3 of the government’s tax plan will flatten out Australia’s personal income tax system, and that structural change to the personal income tax system is eroding its progressivity.

The budget papers have an interesting justification for the changes: they keep the percentage of govt revenue collected from the top 1%, 5%, 10% and 20% of taxpayers roughly stable (in percentage of total terms). Without the changes, I think the numbers indicate that the top 1% of taxpayers and the bottom half of the top 20% of taxpayers currently pay around 16.7% and 16% of the government’s income tax revenue, but without the changes that would reverse to 15.6% and 16.1%, while with them it’s 17% and 15.5%, which seems fairer. On the other hand, in both cases the burden on the bottom 80% of taxpayers is slightly increased in both cases. Not really sure what good answers here are — it really depends on how much more the top x% earn compared to the top y%, and that’s easier to look at just by looking at average and marginal rates anyway — but it seems like an interesting thing to think about.

I did a followup post a few years later, shortly before Gillard got ousted for the brief second Rudd government, looking at something like:

  • tax free threshold of $25,000 [$28,000 inflation adjusted]
  • marginal rate of 35% between $25,000 and $80,000 [$90,000]
  • marginal rate of 40% between $80,000 and $180,000 [$200,000]
  • marginal rate of 46.5% above $180,000
  • dropping Medicare levy, low income tax offset, etc

and noting it’d result in pretty similar government revenue based on the reported taxable income distribution. It’s more effort to get the numbers from the ATO and run them than I can be bothered with for now (and would be pretty speculative trying to apply them to the world of 2024), but tax brackets like

  • tax free threshold of $20,000
  • marginal rate of 20% up to $45,000
  • marginal rate of 32% up to $200,000
  • marginal rate of 47% above that
  • drop Medicare levy, low income tax offset, etc

would be very close to the post-2024 plan, if anyone could manage the politics of not special casing the medicare levy or the low-income offset.

In the same post, I also thought about an unconditional $350 per fortnight payment as an optional alternative to the tax free threshold — so you get $350 a fortnight (tax free) direct into your bank account, but pay 35% from the first dollar you earn other than that all the way to $80k. That seemed like a fairly plausible way to start on a UBI to me — if you’re earning more than $25k per year, it doesn’t affect your total tax bill at all, but it’s a quarter of the minimum wage or about half the newstart allowance, so it’s not trivial, and doesn’t require any additional paperwork or convincing centrelink you’re not a bludger. If you could afford to raise the tax free threshold to $30,000 and just have a 32% rate from there to $200,000 (which would mean everyone earning over $45,000 pays the same tax, while everyone earning less than that pays less tax), you could have a UBI of up to $370/fortnight, without any impact on anyone earning more than $30,000 a year, or any disincentive to work for anyone earning less than that. That still means fitting up to an extra $10,000 per year for all the people who don’t earn more than $30,000 a year into the budget, which still isn’t easy. Maybe an easy way to start might be to make it so you can only opt-in if you’ve filed a tax return for the past three years and are 21 or over, which would exclude a lot of the people who’d otherwise be getting large payouts. Interactions with newstart, and various pensions would also need a bunch of work.

I wish there was a political party that had a policy like that. But the ALP and Greens seem to be against fewer brackets on the general principle that anything that’s good for the rich is bad for Australia (and the Greens think a good starting point for a UBI is $18,200 per year, or even better would be $23,000 per year funded by a top tax bracket of 78% which is just absurd), while the LDP wants a flat 20% tax with a $40,000 tax free threshold and fewer transfer payments rather than more, and everyone else tends to want to only give welfare payments to people who prove they need it, rather than a universal scheme, again on principle, despite that making it harder for welfare recipients to work. The Libs come the closest, but their vision still barely gets one and a half of the four income tax recommendations from the Henry report implemented one and a half decades after the report came out. Which is better than nothing, or going in the wrong direction, but it’s hardly very inspiring.

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