ACOSS report shows taxes are lower and less progressive than people think.

A new ACOSS report released this week looks at how overall rates of tax vary among households, according to income. It follows on the heels of a claim by the Treasurer, Joe Hockey, that middle income earners pay half their income in taxes. Borrowing from ‘tax freedom day’ campaigners, he claimed we work six months of every year for the Government (though they reckon it’s all been paid off by April).

This surprised pretty much everyone who knows the difference between marginal tax rates  and average (overall) tax rates (the marginal tax rate is only paid on that part of your income above your highest tax threshold, not all of your income).

Using published ABS data, the ACOSS report shows that middle income households paid a total of 23% of their gross incomes in tax in 2010, comprising 11% income taxes and 12% taxes on consumption. About half of Hockey’s 50%.

But the real story of the ACOSS report is how the progressive effects of the income tax are almost offset by the  regressive taxes on consumption.

Below are the average rates of income tax paid by each 20% of households in 2010. They rise with income. And underneath that, what we pay in consumption taxes. Those taxes reduce with income, because high income earners save about a third of their income (and don’t pay consumption taxes on that portion) while low income households spend about a quarter more than they earn (e.g. they are drawing down savings or going into debt to survive). Note the impact of all the hidden consumption taxes (excises on fuel, alcohol, etc, Payroll Taxes and Stamp Duties), which is greater than the GST.

income tax distribution

consumption tax distribution

Putting the two together, the Australian tax system is close to ‘flat’. The bottom 20% pays an average of 24% while the top 20% pays 28%.

The more we increase consumption taxes and cut income taxes, the less progressive it gets.

tax distribution

2 thoughts on “ACOSS report shows taxes are lower and less progressive than people think.

  1. Hi Peter, do you how the distribution of taxes paid as a proportion of income has varied through time for the different income bracket? For example has taxes paid by the bottom 20% increase or decreased since the Hawke government’s “reforms”?

    Cheers

    Vik

    Like

    • Hi Vik,
      They became less progressive over the two decades from 1990 – 2010, according to a recent Productivity Commission Report: “http://www.pc.gov.au/research/completed/income-distribution-trends/income-distribution-trends.pdf”>
      See p84: the proportion of income paid in taxes rose for the bottom 3 deciles and fell for the top six deciles. This was probably due to income tax cuts in the 2000s which especially benefited people earning around $100,000 plus, an increase in consumption taxes in the 2000 GST package (mainly affecting the bottom 20%), and increases in employment over the period which altered the distribution of taxable incomes.

      Still, income tax reduces inequality substantially. In 2012, it reduced income inequality by one third. See the Inequality Report just released by ACOSS at: “http://www.acoss.org.au/wp-content/uploads/2015/06/Inequality_in_Australia_FINAL.pdf”>
      Regards
      Peter

      Like

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