More on income diversity

An off-hand statement in the editorial of The Australian today went like this:

Even after the threshold changes in the May budget, the top 5 per cent of taxpayers are going to be paying a quarter of Australia’s net income tax

(Look in the section about Peter Costello)

Well, as I noted earlier, the top 20% of Australians bring in 37.4% of the income. Given the disparity between the various percentiles, it wouldn’t surprise me at all to see that the top 5% (or the top quarter of the top 20%) bring in about two-thirds of that; certainly the curve kept trending upwards.

Assuming that’s correct, than why would it be surprising that a group of people who bring home 25% of the income pay 25% of the income tax? I can tell you why: because under the setup in Australia, it should be higher! Based on the Australian income tax, and the distributions shown in the data from the ABS (see my earlier entry), the top 5% of income earners cut in at about the $2500 gross weekly earnings – or about $130,000 a year. When the tax rates are adjusted again next year (the premise of the editorial), someone earning $130,000/annum should be paying $42309.53 in tax, or a bit under a third of their income. A two income household, evenly split, should be paying $30719.4 in tax – about 24%.In higher-income households, there are a lot more single-income households, but lets say (for ease of reference) that it averages out as a group to 28% of their income is paid in income tax.

That sounds fair, right – they pay 25% of their income in tax, 25% of the income tax is paid by them, and they are meant to pay 28% of their income (on average) as income tax. That’s pretty close to parity. But… they’re meant to pay more than average. Considerably more. A dual-income household on $66,000 (which is higher than average!) is paying between 17% and 24% of their income as tax, depending on how the income is split. So the lower-income household is paying about 20%, and we still haven’t hit the average income levels. The bottom 20%, who bring home less than 5% of the income, actually pay almost no income tax.

In other words, if a group earning about 25% of the income is only paying about 25% of the income tax, then they are actually shirking their tax burden, under the current rules – so they must be paying considerably less than the average 28% of their personal income. Mind you, the editorial notes that: the very rich (who earn their income mostly from investments) pay less than a third the tax share of the highly-paid workers.

(Why should higher income earners pay more income tax? Well, there’s the “socially progressive” reasons – they earn more, they should contribute more. There’s also the “fairness” reason – lower income earners pay a considerable percentage more of their income in indirect taxes, particularly the GST. So it’s fairer to slug higher income earners more in income tax to even out the overall tax burden)

The editorial in question had a push for a flat-tax regime. I actually don’t mind the idea of a flat tax. A flat tax, which cut in at a socially fair level (say, all money earnt after the first $10,000) would actually see the rich pay more, and take on even more of the income tax burden. To do it fair, though, you need to eliminate all loopholes (including those around corporate and investment income) and to eliminate consumption-based taxes (or raise the threshold higher). But I can’t see the so-called tax reformists in the Liberal party doing this.

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