Scrap the 10% 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 - $27,222 = 0%
$27,222 - $34,027 = 10%
> $34,027 = 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 just over $27k/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 and confusing part of 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.

23 June 2025

UPDATE: ATA Chief Economist John Humphreys spoke with independent journalist Topher Field about the problem with high taxes and the need to remove the 10% Medicare Levy bracket. Released on 6 July 2025.

UPDATE: The federal government will be running their Economic Reform Roundtable on 19-21 August 2025 to discuss ideas to boost productivity (good) and boost revenue (not so good). In response, the Australian Taxpayers’ Alliance has put in the following submission, calling for the government to remove the inefficient and regressive 10% Medicare Levy bracket.

A modest proposal for the economic reform roundtable:
Remove the 10% Medicare Levy bracket
Dr John Humphreys, 25 July 2025