23 January 2015
ACOSS today released a new report on Australia’s taxation system which examines how fair our tax is system currently.
ACOSS CEO Dr Cassandra Goldie:
“We undertook this research to provide accurate information to the public about how the tax system currently works, and who is contributing what share. The findings challenge the suggestion that people are contributing half their income to tax. This is clearly untrue.
“Our research found that although the personal income system is relatively progressive, households on the highest incomes are contributing a modest 20% of their income through taxation. This is because the marginal tax rates are incremental i.e. people on the highest incomes still pay no tax on the first $18 000 they earn, and then for every dollar over that, they contribute 19% up to $80 000, then 32.5% for every extra dollar up to $180 000 and are only then paying 45% on the income earned over $180 000.
“In addition, people on higher incomes are able to avoid paying the marginal rates of tax by diverting income into superannuation, or via negative gearing, trusts and other ‘tax effective’ arrangements which have lower tax rates or are tax free. A third of the value of tax concessions on superannuation, for example, goes to the top 10% of income earners.
“Further, the relative progressivity of our personal income tax system is offset by consumption taxes like the GST and other indirect taxes, producing an overall rate similar to that of a flat rate tax of around 25% on all income groups.
“When you combine the effects of personal income tax with consumption and other indirect taxes, the bottom 20% of households pays an average of $129 per week or 24% of their income in tax, while the top 20% pays an average of $1,006pw or 28% of their income in tax. The second 20% pays 21% of their income in tax.
“The key message from this research is that, in order to ensure people are paying their fair share of tax, in accordance with their capacity to pay, we must give priority to reviewing tax minimisation and loophole arrangements that enable higher income tax earners to reduce their income taxed at marginal rates. We must also recognise that the more you move away from the progressive personal income system to rely on consumption taxes like the GST the greater the inequality because low income earners spend a higher proportion of their income on consumption and therefore are impacted to a greater extent (currently 7% for the lowest income households, compared to 3% for households in the highest quintile).
“We are concerned about how skewed the current tax debate is becoming. We seem to be only talking about the GST, yet our modelling shows that lifting or broadening the GST would hit the lowest earners much more than the highest earners.
“Yet we know that superannuation tax concessions and those for trusts, negative gearing and capital gains are far more likely to raise money from well off households than the GST who have a greater capacity. These areas should be a first priority for reform.
“We hope this research leads to a more sensible debate, where everything is in on the table and we have transparency about the facts.”
The personal income system is relatively progressive:
- Bottom 20% pays an average of 3% of their income
- Top 20% pays an average of 20% of their income
Consumption and other indirect taxes are regressive usually ‘flat taxes’ with no tax-free threshold
– They do not tax the portion of income that is saved, and high income earners save more
– Overall, the average rate of the Goods and Services Tax paid declines with income, unlike income tax where it increases. ABS modelling shows:
- The bottom 20% pays an average of $38pw in GST, or 7% of their income
- The top 20% pays an average of $103pw in GST, or 3% of their income
Other ‘indirect’ taxes include business taxes like Payroll Tax, Stamp Duties, and Fuel Excise (this includes State as well as Federal taxes), which are largely passed on to consumers
– These raise more revenue overall than the GST and together have a greater overall impact on household expenses. ABS modelling shows
- The bottom 20% pays an average of $77pw or 14% of their income
- The top 20% pays an average of $183pw or 5% of their income
The combined effect of income and consumption taxes – including income tax, GST and other indirect taxes – when added together is not as progressive as often believed. In fact, the picture is much more nuanced, with a rate similar to that of a flat rate tax on incomes of around 25% (+ or – up to 4 %) on all income groups
– The progressive effect of the personal income tax is substantially offset by the GST and other indirect taxes, so that:
- The bottom 20% pays an average of $129pw or 24% of their income
- The top 20% pays an average of $1,006pw or 28% of their income
- The second 20% pays 21% of their income
The greater the role for personal income taxes in the overall tax mix, the greater the reduction in household income inequality from the tax system as a whole.
ACOSS CEO Dr Cassandra Goldie is available for interview.
Media phone: 0419 626 155