Fix the Medicare Levy

The Medicare Levy is often described as a flat 2% tax on everybody's income... but that is not correct. In reality, the Medicare Levy marginal tax rates and thresholds are:

$0-26k = 0%
$26-32.5k = 10%
>$32.5k = 2%

In a little-known quirk of our tax system, some low-income earners are slugged with an exorbitant 10% Medicare Levy marginal rate, in an attempt to “claw back” the tax-free threshold. Not only does this undermine incentives and hinder productivity, but it creates a regressive step in our tax system, where people earning $30k/year pay a higher marginal tax rate than people on $35k/year.

This problem is easy to fix. The government should keep the Medicare-Levy tax free threshold (current set at $26k/year), but then remove the regressive 10% bracket, so that the 2% rate applies to all incomes over that threshold. This would lower revenue by a very manageable $2-3 billion, which is less than most tax reform ideas and well within the budget of a responsible government.

The benefits are threefold:

  1. Give most workers a tax cut of $520/year,

  2. Remove a regressive step in our tax system, and

  3. Lower the marginal tax rate on low-income earners to help boost productivity.

This is a win-win-win reform. The government has recently announced a renewed focus on tax reform and productivity. If they are serious, then they should steal this idea.