Earlier this week, data released by Treasury under a Freedom of Information request, were published in the media that showed Treasury predictions the Abbott Government’s budget measures were likely to hit lower income households harder than higher income households. In response, Treasurer Joe Hockey said “higher income households pay half their income in tax”. Check the facts below; no one is paying half their income in tax.
In making this claim, Mr Hockey has confused marginal tax rates with average tax rates.
Marginal tax rate is the amount of tax paid on each dollar earned over a tax bracket threshold. The income tax brackets and marginal tax rates for 2014-15, which apply from 1 July 2014, are listed in the table below.
|Taxable income||Tax on this income|
|$18,201–$37,000||19c for each $1 over $18,200|
|$37,001–$80,000||$3,572 plus 32.5c for each $1 over $37,000|
|$80,001–$180,000||$17,547 plus 37c for each $1 over $80,000|
|$180,001 and over||$54,547 plus 45c for each $1 over $180,000|
The top marginal tax rate is 45 cents in the dollar. This marginal tax rate is applied to incomes over $180,000 per year. It is not the tax rate paid on income up to $180,000.
When you add to this the 2% Medicare levy and 2% temporary budget repair levy, you get a marginal tax rate of 49%. This is presumably what Mr Hockey was referring to when he said higher income earners pay half their income in tax.
However, marginal rates of tax are not the same as average rates of tax.
Average tax rate is the ratio of tax paid divided by total income.
The tax paid on an income of $180,001 is $54,547 for the first $180,000 plus 45 cents for the additional dollar. The average tax rate is $54,547.45 divided by $180,001 which equals 30.3%. This excludes the Medicare levy and temporary budget repair levy.
The top one per cent of income earners in Australia based on tax data from 2011-12 would pay 39% of their income in tax based on the 2014-15 tax rates, including the two additional levies. This average tax rate is 10% below their marginal rate of tax.
The average tax rate is lower than the marginal tax rate.
Higher income households are defined by Treasury using disposable income, which takes into consideration any taxes paid and any government benefits received (i.e family tax benefit, pensions and Newstart). Household size is also accounted for. Treasury define a single person household with $57,000 in disposable income as higher income. A couple with two children with a disposable income of over $120,000 are defined as a higher income household.
Tax data on individuals is available from the ATO. In the table below we have calculated the average tax paid for a number of different scenarios of what might be considered higher income. The percentage of income tax paid includes the Medicare levy and where applicable the temporary budget repair levy. We have used individual tax data because household’s disposable income is more difficult to obtain.
Percentage of income paid in tax
The table shows it doesn’t matter what definition you use for higher income, no one is paying half their income in tax.