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.
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.