Budget 2018-19's absurd tax paradigm

The "big reveal" of this year's budget was the tax reform, which includes elements for this year, and then further changes in 2022 and 2024. While I applaud the general idea, the nature of the changes are messy and convoluted. In this post I will explain how the actual tax rates are projected to change over the coming years.

 

Despite claims that we have a fairly simply progressive tax system of 0%, 19%, 32.5%, 37%, 45%, the current situation is actually much more complicated due to the medicare levy and low-income tax offset (LITO), which create two anomalous moments of regressive tax. These are the current rates:

$0 - $20,542 .......... 0%
$20,543 - $21655 ... 19%
$21656 - $27068 .... 29%
$27069 - $37000 .... 21%
$37001 - $66667 .... 36%
$66668 - $87000 ... 34.5%
$87001 - $180000 .. 39%
> $180,001 .............. 47%

For 2018-19, the government proposes to switch to the following system:

$0 - $21595 ............. 0%
$21596 - $21980 ..... 19%
$21981 - $27475 ..... 29%
$27476 - $37000 ..... 21%
$37001 - $48000 ..... 33%
$48001 - $66667 ..... 36%
$66668 - $90000 ..... 34.5%
$90001 - $125333 ... 40.5%
$125334 - $180000 ... 39%
> $180,001 ................ 47%

Note the changes are:
(1) increase tax-free threshold from $20,542 to $21,595 (LMITO)
(2) for people earning $21,655 to $21,980, marginal rates decrease from 29% to 19% (change in medicare levy)
(3) for people earning $27,068 to $27,475, marginal rates increase from 21% to 29% (change in medicare levy)
(4) for people earning $37-48k, marginal tax rates decreased from 36% to 33% (LMITO)
(5) for people earning $87-90k, marginal tax rates decreased from 39% to 34.5% (adjusted tax bracket)
(6) for people earning $90,000 to 125,333, marginal tax rates increased from 39% to 40.5% (LMITO)

Then from 2022-23 we can (supposedly) expect the following marginal income tax rates:

$0 - $21595 ............. 0%
$21596 - $21980 ..... 19%
$21981 - $27475 ..... 29%
$27476 - $37000 ..... 21%
$37001 - $41000 ..... 27.5%
$41001 - $66667 ..... 36%
$66668 - $120000 ..... 34.5%
$120001 - $180000 ... 39%
> $180,001 ................ 47%

Note the changes are:
(1) for people earning $37-41k, marginal tax rates decrease from 33% to 27.5%
(2) for people earning $41-$48k, marginal tax rates increase from 33% to 36%
(3) for people earning $90-$120k, marginal tax rates decrease from 40.5% to 34.5%
(4) for people earning $120,000 to $125,333, marginal tax rates decrease from 40.5% to 39%

And finally, from 2014-25 onwards we can (supposedly) expect the following "simplified" marginal income tax rates:

$0 - $21595 ............. 0%
$21596 - $21980 ..... 19%
$21981 - $27475 ..... 29%
$27476 - $37000 ..... 21%
$37001 - $41000 ..... 27.5%
$41001 - $66667 ..... 36%
$66668 - $200000 ... 34.5%
> $200,001 ................ 47%

Note the changes are:
(1) for people earning $120-180k, marginal tax rates decrease from 39% to 34.5%
(2) for people earning $180-200k, marginal tax rates decrease from 47% to 34.5%

~~~~~~~~~~~~~~~

These changes are certainly better than nothing and do represent tax relief for many. However, they are far more complicated than necessary, difficult to clearly explain, and the marginal tax rates (therefore incentives) jump around like a frog on meth. Even after all these improvements, we are still left with a messy (and sometimes regressive) tax system that needs further reform.

Finally, it is worth noting that you may not see these numbers in the mainstream media. That is not because they're trying to mislead you, but rather it's because our tax system is so complex that most journalists (like most people) simply don't understand what's happening. As a result, they are likely to repeat the simplified narrative they are given by the government. 

Dr John Humphreys is an economist and Deputy Director at the Australian Taxpayers' Alliance. 

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