Recent personal income tax progressivity trends in Australia

Davis, Graeme; Akroyd, Philip; Pearl, David; Sainsbury, Tristram Working Paper Recent personal income tax progressivity trends in Australia Treasury Working Paper, No. 2019-05 Provided in Cooperation with: The Treasury, The Australian Government Suggested Citation: Davis, Graeme; Akroyd, Philip; Pearl, David; Sainsbury, Tristram (2019) : Recent personal income tax progressivity trends in Australia, Treasury Working Paper, No. 2019-05, The Australian Government, The Treasury, Canberra This Version is available at: https://hdl.handle.net/10419/210406 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/3.0/au/legalcode RECENT PERSONAL INCOME TAX PROGRESSIVITY TRENDS IN AUSTRALIA Graeme Davis, Philip Akroyd, David Pearl and Tristram Sainsbury1 Treasury Working Paper2 2019-05 Date created: September 2019 1 Graeme Davis, David Pearl and Philip Akroyd are from the Tax Framework Division and Tristram Sainsbury is from the Individuals and Indirect Tax Division, The Treasury, Langton Crescent, Parkes ACT 2600, Australia. We thank Maryanne Mrakovcic, Marisa Purvis-Smith and Robert Raether for their valuable feedback on an early draft of this paper, and James Stevens and Alexander Sibelle for research assistance. 2 The views expressed in this paper are those of the authors and do not necessarily reflect those of The Australian Treasury or the Australian Government. © Commonwealth of Australia 2019 This publication is available for your use under a Creative Commons BY Attribution 3.0 Australia licence, with the exception of the Commonwealth Coat of Arms, the Treasury logo, photographs, images, signatures and where otherwise stated. The full licence terms are available from http://creativecommons.org/licenses/by/3.0/au/legalcode. Use of Treasury material under a Creative Commons BY Attribution 3.0 Australia licence requires you to attribute the work (but not in any way that suggests that the Treasury endorses you or your use of the work). Treasury material used 'as supplied' Provided you have not modified or transformed Treasury material in any way including, for example, by changing the Treasury text; calculating percentage changes; graphing or charting data; or deriving new statistics from published Treasury statistics — then Treasury prefers the following attribution: Source: The Australian Government the Treasury Derivative material If you have modified or transformed Treasury material, or derived new material from those of the Treasury in any way, then Treasury prefers the following attribution: Based on The Australian Government the Treasury data Use of the Coat of Arms The terms under which the Coat of Arms can be used are set out on the It’s an Honour website (see www.itsanhonour.gov.au) Other uses Enquiries regarding this licence and any other use of this document are welcome at: Manager Media Unit The Treasury Langton Crescent Parkes ACT 2600 Email: [email protected] Recent personal income tax progressivity trends in Australia Graeme Davis, Philip Akroyd, David Pearl and Tristram Sainsbury 2019-20 September 2019 ABSTRACT Tax progressivity is not a precise science. Judgements around the level of tax progressivity need to balance the objective of fairness against other objectives – such as efficiency, simplicity and sustainability – that underpin the design of tax systems. Further, people’s perceptions of fairness depend on a range of factors, including their position in society and the information available to assess their position relative to others. Our analysis of average personal income tax rates, and the distribution of personal income tax incidence, over recent decades suggests that Australia’s personal income tax system became more progressive over the 22 years between 1994-95 and 2015-16. Choices by successive Australian governments have altered marginal personal income tax rates and extended tax thresholds in ways that have reduced the income tax incidence on lower income earners, and increased the income tax incidence on higher income earners. This has also seen an increase in income tax concentration, whereby a narrower proportion of high income earners pay a larger share of total Australian personal income taxes. In publishing these findings, we seek to inform the trade-offs arising from the progressive personal income tax regime and its role within the broader Australian tax system. However, care needs to be taken in evaluating these findings. Our analysis does not seek to evaluate the fairness (real or perceived) of Australia’s personal income tax. Graeme Davis, Philip Akroyd and David Pearl Tax Framework Division Revenue Group The Treasury Langton Crescent Parkes ACT 2600 Tristram Sainsbury Individuals and Indirect Tax Division Revenue Group The Treasury Langton Crescent Parkes ACT 2600 4 1. INTRODUCTION A progressive personal income tax regime has been a longstanding feature of Australia’s tax (and transfer) system. This paper provides a framework for considering the progressivity of our personal income tax system and the implicit policy trade-offs arising from such a system. We also examine recent trends in income tax progressivity and some of the factors that may be influencing public perceptions. We do not seek to present a view on whether these policy outcomes are fair. The paper is structured in two main sections. First, we ask what is meant by tax progressivity. We discuss some of the complexities that make progressivity a challenging concept to pin down. We also explore some of the policy trade-offs between tax progressivity and other tax system objectives. Or, to put it another way, we explore what is being given up by pursuing a progressive personal income tax system. Second, we examine Australia’s personal income tax progressivity trends for the 22 year period from 1994-95 to 2015-16,3 in terms of average and marginal tax rates, the changing distribution of personal income tax paid, and the concentration of taxes. We then provide some concluding observations. 2. WHAT IS PROGRESSIVITY? A tax can apply to a taxpaying population in one of three ways: • it is progressive if the average rate of tax increases as the base (for example, income or expenditure) increases; • it is proportional if the average rate of tax is constant; and • it is regressive if the average tax rate decreases as the base increases. Charts 1a and 1b depict a progressive tax, a proportional tax and a regressive tax on an income tax base, measured by average tax rate and tax paid. Despite the average tax rate curves (Chart 1a) having a fundamentally different character, with only one being progressive, all three deliver an outcome where tax paid increases as the base increases (Chart 1b). 3 Why the period from 1994-95 to 2015-16? Inevitably the selection of two points of time requires a degree of judgement. At the time we started this research, these dates provided the broadest, relatively accessible data set for analysis. We note that the Australian Taxation Office has since released a more recent set of taxation statistics for the 2016-17 income year; our preliminary analysis of the additional data suggests it is not inconsistent with our broader findings. 5 Chart 1A A stylised proportional, progressive and regressive tax, measured by average tax rate Chart 1B A stylised proportional, progressive and regressive tax, measured by tax paid Source: Author. When assessing the progressivity of a tax, it is important to understand what is (and is not) in the tax base. For this paper we will use the general basis for calculating personal income tax liabilities – ‘taxable income’ – on an individual taxpayer’s annual cash flow. This definition includes the primary forms of labour income, typically salary and wages, as well as net capital gains (noting that there are a range of discounts and exemptions for some capital gains), interest, dividends, royalties and rental income. The definition also excludes the earnings of some individuals. For example, if an individual indirectly earns and retains income through a superannuation fund, corporate entity or trust, this income will not be observed as part of that individual’s taxable income in a particular year. A tax system constructed entirely of flat marginal rate tiers – such as Australia’s personal income tax system – will still be progressive provided the average tax rate curve is upwards sloping. This means that two individuals with different levels of taxable income may face the same marginal tax rate, while the individual with a higher income will face a higher average tax rate4. To illustrate, take the simplified, stylised progressive personal tax rate scales proposed in the Review of Australia’s Future Tax System (Chart 2). Person A with taxable income of $150,000 faces a marginal tax rate of 35 per cent and pays $43,750 in tax, at an average tax rate of 29.2 per cent. Person B with taxable income of $50,000 also faces the same 35 per cent marginal tax rate but pays $8,750 in tax at an average tax rate of 17.5 per cent. Person A earns three times as much as person B, but pays about five times as much tax, and contributes a much greater share of their income as tax. 4 The average tax rate determines an individual’s total return from earning income, while the marginal tax rate determines the return from earning additional income. 6 Chart 2. Indicative personal income tax rates scale Note: See appendix for tax paid, marginal tax rates and average tax rates by taxable income Source: Author calculations, Review of Australia’s Future Tax System. There are two factors that influence the way the average tax rate curve affects a population. The first is policy decisions, which directly change the shape of the average tax curve and what is captured as part of the tax base. Policy decisions include governments altering headline marginal rates and thresholds to increase the average tax rate slope (become ‘relatively more progressive’) or flatten its slope (become ‘relatively less progressive’). They also include decisions to broaden or narrow the income tax base through exemptions, offsets and deductions. Such policy decisions may affect taxpayers at the bottom, middle and top of the income distribution in different ways. The second factor is nominal income growth, which pushes individual taxpayers along the average tax rate curve. People’s pre-tax incomes grow independently of tax policy changes. Bracket creep, which occurs when individuals pay a higher proportion of their income as tax due to income growth, then becomes an ‘automatic’ feature of a system that contains a fixed (non-indexed) progressive tax schedule.5 The effect of policy decisions and income growth is illustrated in Chart 3. Chart 3. Stylised effect of income growth and policy change on average tax Source: Author calculations. 5 Bracket creep is not simply due to some taxpayers ‘moving’ into higher tax brackets. Those in the same tax bracket are affected as well, as a higher proportion of their incomes are taxed at their highest marginal rate. 0 10 20 30 40 50 60 70 80 90 100 0 5 10 15 20 25 30 35 40 45 50 $0 $25,000 $50,000 $75,000$100,000$125,000$150,000$175,000$200,000$225,000$250,000 $'000Per cent Taxable Income ($pa) Marginaltax rate (LHS) Tax paid (RHS) Averate taxrate (LHS) Bmarginal Amarginal Baverage Aaverage Change definition of taxable income 7 Evaluations of progressivity hinge on comparisons of different points along the distribution. These comparisons are based on perceptions of where ‘you’ are (the tax rate that applies to your income) relative to someone else (the tax rate that applies to their income). Additional layers of difficulty are added when comparing across different tax bases, for example, both income and superannuation, or between two different points in time. Drawing meaning from such comparisons moves beyond technical definitions, and into exploring the rationale behind income taxation. Why progressive income taxation? Tax progressivity is not a precise science. There is no ideal or ‘optimal’ analytical level of tax progressivity. Instead, the ‘right’ degree of tax progressivity is a question ultimately determined through the political process. It hinges on judgements that are based on societal preferences for equity or fairness (which may change over time) relative to other policy objectives. Notions of fairness are subjective, nebulous and contested. They are based on morals and ethics, with arguments drawn from a number of competing theories and philosophies of distributive justice.6 Given there is no single viewpoint on what is fair, and judging fairness frequently relies upon value judgements, we do not intend to place a particular emphasis on any of these philosophies. All three taxes shown in Chart 1a, for example, could be argued as fair by particular individuals and in certain contexts.7 However, two fairness principles are often cited as policy rationales for progressive income taxation: ‘the benefit principle’, which can be generalised as taxation being ‘the price of engaging in civilised society’;8 and ‘the capacity to pay principle’, which can be generalised as an individual’s ability to pay tax increases as his or her income (or assets) increase. These rationales behind progressive income taxation have attracted widespread political and community support within Australia over an extended period of time.9 As part of the capacity to pay principle, the 1975 Asprey Review discussed two key concepts of vertical and horizontal equity. Specifically: As a quality of a tax or a tax system everyone demands fairness, or equity (the terms will be used interchangeably). But, in tax matters as in law and ethics, it is an ideal exceedingly difficult to define and harder still to measure. It is customary to distinguish the two dimensions of ‘horizontal’ and ‘vertical’ equity: the notions that it is fair that persons in the same situation should be equally treated, and those in different situations [should be] differently treated, with those more favourably placed being required to pay more.10 [emphasis added] 6 For example equality of opportunity, libertarianism, utilitarianism, Rawlsianism, and the capabilities approach would all produce different definitions of fairness. 7 For example, it could be argued that regressive taxes, such as tobacco taxes, are fair in terms of their broader social impact and the higher absolute dollar tax incidence on those able to spend more on these forms of consumption. 8 The benefit principle is not a new concept. See, for example, Adam Smith in The Wealth of Nations, Volume V, paragraph 2.25: ‘The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation.’ 9 A curious aside is that while personal income taxes raise more than 50 per cent of Commonwealth revenue, there is nothing inherent to the annual personal income taxation system that requires it to be the primary vehicle to raise revenue and to approximate capacity to pay. In fact, income taxation only became a dominant feature of Australia’s tax mix in the aftermath of the two World Wars. Prior to this, attempts to achieve progressivity included taxing land and inheritance. 10 Asprey, K, and Parsons, R, 1975, Commonwealth Taxation Review Committee, Full Report January 31 1975. Chapter 3, para 7. 8 The concept of vertical equity, in particular, may help explain the presence of progressive income tax rates in Australia. Incomes are not evenly distributed across the Australian population, and these differences result in different capacities to pay income tax. A proportional income tax levied at a constant percentage rate (without exemptions or arbitrage opportunities that undermine horizontal equity) would provide for a proportionate obligation across all individual taxpayers, with those on higher incomes paying higher amounts of tax. However, progressive income taxation, where those on higher incomes pay higher average rates of income tax than those on lower incomes, has come to be seen as a key means for satisfying demands for vertical equity. Progressivity requires trade-offs In considering ‘how much’ progressivity we might want in a tax system, we require two sets of judgements. First, progressivity must be balanced against other desirable features of the tax system (with objectives typically categorised into equity, efficiency, simplicity, and sustainability). In particular, progressivity can adversely affect the efficiency of the system. Escalating marginal effective tax rates can distort individual decisions to work, save and invest. This is irrespective of whether one is a lower or higher income earner. In general, systems that are more steeply progressive — that is, with higher marginal tax rates and a greater distance between marginal and average tax rate curves — will generate greater inefficiencies. Second, and perhaps less widely recognised, the vertical equity objectives of progressivity must be balanced against other conceptions of fairness. In particular, there is the potential for tension between vertical equity and horizontal equity.11 Australia’s tax system is highly complex with different income tax rates applying to companies, individuals, and superannuation funds. This means that two individuals in the same economic position can achieve markedly different tax outcomes, at particular points in their life course (and across generations), depending on their respective abilities to more flexibly realise income. The horizontal equity principle – that those in the same situation should be treated equally – is relevant irrespective of the level of income earned. That said, the incentives to engage in tax-effective arrangements that undermine horizontal equity increase as a taxpayer’s marginal personal tax rate increases. The reason is that differences between the tax rates of the progressive personal income tax schedule and other forms of income become more pronounced for those with higher levels of income. This creates a stronger return from seeking out lower tax rates for a marginal dollar. Achieving higher vertical equity, such as through higher tax rates or a more steeply increasing progressive tax rate schedule, therefore, carries the potential to prompt behavior that both undermines vertical equity and compromises horizontal equity. These arguments highlight that there is no single ‘correct’ reform solution in balancing the economic efficiencies of a particular tax with different conceptions of fairness. Conceptions of fairness will also extend to the nature of what should or should not be included in the tax base, and how well base inclusions and exclusions reflect one’s capacity to pay tax. In any diverse community, support will be expressed for a variety of possible approaches. In practice, progressive income tax systems attempt to 11 There is also a dynamic interpretation of horizontal equity, expressed in the idea that people should not be penalised by the tax system for seeking to better their lives. This implies that people should not face higher marginal tax rates when their incomes increase. If two people were to start with the same chances in life, the idea is that neither person should be penalised, in the form of a higher marginal tax rate, if they decide to raise their income (such as by working harder or investing in their education and skills). 15 • an ageing population and increasing prominence of tax-free retirement incomes following the introduction of the superannuation reforms of 2006-07. Chart 7. Proportion of personal income taxpayers in the over-18 population, 1994-95 to 2015-16 Source: Australian Taxation Statistics, Australian Bureau of Statistics In addition to the overall falling share of personal income taxpayers, there appears to be an increasing concentration of the personal income tax incidence on those on higher taxable incomes, and reducing tax incidence on those in the bottom half of the income distribution (Chart 8a and 8b). In particular, the share of taxable income accruing to the top decile of taxpayers increased by 5 percentage points, while the share of revenue collected increased by 9 percentage points. The increasing tax concentration, beyond trends in taxable income growth, appears to be particularly influenced by the income tax compensation designed as part of the introduction of the GST, and the mining boom, with a subsequent share stabilisation since the global financial crisis. The increasing concentration means that, in 2015-16, the top 5.4 per cent of the adult population (the 10 per cent of taxpayers or the approximately one million taxpayers earning more than approximately $126,000) contributed 45 per cent of personal income tax revenues at an average tax rate of 36 per cent. By contrast, in 1994-95 the top 6 per cent of the adult population (the 10 per cent of taxpayers or approximately 800,000 taxpayers earning more than $48,750) contributed approximately 36 per cent of total personal income tax receipts at an average tax rate closer to 31 per cent. A greater revenue reliance on a small number of high-income earners, paying high average tax rates, imposes two pressures on Australia’s personal income tax system. First, to the extent that those who face higher marginal personal income tax rates also face a larger tax rate differential between their marginal tax rate on personal income and the marginal tax rate on corporate, superannuation, and capital sources of income, this creates a greater incentive for taxpayers to seek out tax planning opportunities. Importantly, if an increase in tax planning is viewed as out of step with broader community perceptions of fairness, then there is a risk of declining community confidence in the tax system and therefore a greater incentive for more people to tax plan. This may raise broader tax morality issues. Second, the greater tax concentration on high-earning individuals suggests that fluctuations in the taxes paid by this group would have a greater bearing on aggregate Commonwealth revenue collections. 48% 50% 52% 54% 56% 58% 60% 62% 48% 50% 52% 54% 56% 58% 60% 62% 1994-95 1997-98 2000-01 2003-04 2006-07 2009-10 2012-13 2015-16 Per centPer cent 16 Chart 8a Share of taxable income and personal income tax paid by top 10 per cent of personal income taxpayers, 1994-95 – 2015-16 Chart 8B Share of taxable income and personal income tax paid by bottom 50 per cent of personal income taxpayers, 1994-95 – 2015-16 Source: Australian Taxation Statistics. 4. CONCLUDING OBSERVATIONS This paper has explored what a progressive tax is, described the policy levers for delivering it, examined the nature and measurement of progressivity, and illustrated some trends around progressivity in the Australian personal income tax system. The paper has highlighted a change in taxable incomes across the 22-year period. In an absolute sense, nominal taxable income growth has been strong across the taxpaying population since 1994-95. In a relative sense, the slowest growth rates have applied to incomes in the middle deciles of the income distribution, and fastest have applied to those at the bottom and top of the distribution. While not an exact science, it also appears that Australia’s personal income tax system has become more progressive since 1994-95. Successive Australian governments have collectively reduced marginal personal tax rates and increased personal tax thresholds, and, in doing so, have redistributed personal income tax incidence away from lower income earners and towards higher income earners. There has been a consequential increase in personal income tax concentration onto a narrower proportion of high income earners within the Australian population. We have not evaluated the fairness (real or perceived) of these changes. Some may argue that the current system is delivering the ‘right’ level of fairness. Others may argue that the current system is ‘unfair’ for different groupings of the population, in particular ways. Finally, in interpreting these developments, it is important to understand that personal income taxation can only tell so much of the overall Australian tax progressivity story. The interactions between the progressivity of income tax and: the tax treatment of capital, savings, and consumption; state taxation; and the transfer system have been beyond the scope of this analysis. However, these interactions, and their impact on the tax system, are important parts of the overall assessment and would therefore be valuable avenues for further work. 20% 25% 30% 35% 40% 45% 50% 20% 25% 30% 35% 40% 45% 50% 1994-95 1999-00 2004-05 2009-10 2014-15 Per centPer cent Tax paid by top 10% Taxable income of top 10% 0% 5% 10% 15% 20% 25% 30% 0% 5% 10% 15% 20% 25% 30% 1994-95 1999-00 2004-05 2009-10 2014-15 Per centPer cent Taxable income of bottom 50% Taxpaid by bottom 50% 17 REFERENCES Asprey, K, and Parsons, R, 1975, Commonwealth Taxation Review Committee, Full Report January 31 1975. Available at http://adc.library.usyd.edu.au/data-2/p00087.pdf, accessed October 2018 Commonwealth of Australia, 2009, Review of Australia’s Future Tax System, Final Report. Available at https://taxreview.treasury.gov.au/Content/Content.aspx?doc=html/home.htm, accessed October 2018. Commonwealth of Australia 2015, Re:think Tax discussion paper. Available at http://bettertax.gov.au/publications/discussion-paper/, accessed October 2018. Commonwealth of Australia, 2017, Changes in average personal income tax rates: distributional impacts, Report no. 03/2017, Parliamentary Budget Office. Available at https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Budget_Office /Publications/Research_reports/Report_03_2017, accessed October 2018. International Monetary Fund (IMF), 2017, Tackling Inequality: Fiscal Monitor, World Economic Outlook, October. Janda, M, 2018, Budget 2018: Income tax brackets and how the Government’s plan really works, ABC News, 11 May. Kakwani, N, 1977, Measurement of Tax Progressivity: An International Comparison, Economic Journal 87 (345): 71–80. Organisation for Economic Cooperation and Development (OECD), 2018, Taxing Wages 2018, April. Peter, K, Buttrick, S, and Duncan, D, 2010, Global Reform of Personal Income Taxation, 1981−2005: Evidence from 189 Countries, National Tax Journal 63 (3): 447−78. Pigou, A, 1928, A Study in Public Finance, London: Macmillan. Productivity Commission, 2018, Rising inequality? A stocktake of the evidence, Commission Research Paper, Canberra. Available at https://www.pc.gov.au/research/completed/rising-inequality, accessed October 2018. Whiteford, P, 2013, Australia: Inequality and Prosperity and their impacts in a radical welfare state, HC Coombs Policy Forum, Australian National University, March. Available at https://crawford.anu.edu.au/pdf/events/2013/8801/Whiteford-Australia-Inequality-and-Prosperityfinal.pdf, accessed October 2018. 18 APPENDIX KEY PROGRESSIVITY EXCERPTS FROM MAJOR TAX REVIEWS The goal of progressivity and the potential role for personal income tax in achieving it has been long featured in Australian tax research. The Asprey Review in 1975 highlighted the significant role that an income tax can play in creating a horizontally equitable system. An almost limitless range of provisions for horizontal equity can be introduced into it [income tax]. Any degree of progressivity can be enacted. It is indeed the only tax currently in the tax system that is capable of raising large revenues and into the structure of which a refined set of progressive provisions can be incorporated.18 This review was, however, still wary of the possible negative implications that excessive doctoring of the personal income tax system in search of progressivity could have for the system’s ability to achieve vertical and horizontal equity. The more features that are incorporated into an income tax system to instigate progressivity, the more susceptible that system becomes to tax minimisation strategies, increasing the general costs of tax administration and reducing the system’s ability to provide horizontal and vertical equity. Complexity is introduced when many allowances are believed to be called for by horizontal equity; and more when, with a highly progressive scale, measures have to be taken to prevent or control the transfer of incomes from persons in high tax ranges to those lower down.19 Debate about the best way to reform tax continued in the 1985 Draft White Paper on Reform of the Australian Tax System. It was noted here that a ‘major problem with the existing scale is that of high marginal tax rates at relatively modest income levels, creating incentives to avoidance and evasion and disincentives to producing income’.20 The progressive rates were again noted as influencing behaviour in such a way as to encourage tax avoidance and through this reduce the capacity of providing horizontal and vertical equity. The benefits of having a large tax-free threshold were also discussed, with it being generally viewed as an expensive way of assisting low income earners, due to the flow through effect extending to the entire population. As a means of providing that low income earners do not bear tax, the tax-free threshold is a very expensive concession in terms of taxation revenue forgone since all taxpayers enjoy the threshold regardless of size of income.21 The Review of Australia’s Future Tax System in 2008 furthered discussion on the possibility of making progressivity less distortionary for people’s behaviours. This review acknowledged that a system of rising marginal rates is not the only way of achieving progressivity. 18 Asprey Taxation Review Committee, ‘Full report’, 31 January 175, page 17 http://adc.library.usyd.edu.au/view?docId=law/xml-main-texts/p00087.xml;database=;collection=;brand=ozfed; 19 Ibid. 20 ‘Cabinet Memorandum 2875 – Draft White Paper on reform of the Australian tax system –Decision 5629’ May 1985, page 166. https://recordsearch.naa.gov.au/SearchNRetrieve/Interface/DetailsReports/ItemDetail.aspx?Barcode=31427390&isAv =N 21 Ibid, page 167. 19 Progressivity can be achieved either through a flat tax rate with a tax-free threshold, a rising personal income tax rates scale, or a combination of both. Progressivity does not necessarily require increasing effective marginal tax rates.22 The AFTS Review argued that a flat rate would be more effective, due to being more transparent. The personal income tax system should continue to be progressive, but it should operate in a simpler and more transparent way. The centrepiece of the system should be a high tax-free threshold with a constant marginal rate for most people.23 It also argues against excessively high taxes being levied against those in the top brackets. The redistributive goals of progressive taxation need to be weighed against the effects that progressive taxes have on incentives to invest in education, training and skills and to engage in entrepreneurial activity. Even with strong preferences for redistribution, steeply rising marginal rates at the top of the income distribution will be counter-productive — it only makes sense to tax people to the extent that they are still willing to work or engage in entrepreneurial activity.24 Although the review advocated against the excessive use of structural offsets, arguing that it would be more transparent to incorporate such changes into marginal rates, it did acknowledge that such offsets have ‘the advantage of allowing governments to target taxes and transfers with much greater precision than would be possible if it simply reduced tax liabilities’.25 The recent 2015 Re:Think Tax White Paper emphasised the necessity of having a progressive tax system in ensuring continued faith in the fairness of the Australian tax system. Although it did not outline a specific marginal tax rate structure, it did state that the ‘potential benefits from income splitting arise from the progressivity and effective tax-free thresholds in the individuals income tax system’.26 22 Henry Review Panel, ‘Australia’s future tax system’, http://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/Publications/Papers/Final_Report_Part_2/chapt er_a1.htm 23 Henry Review Panel, ‘Australia’s future tax system’ http://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/Publications/Papers/Final_Report_Part_2/Chapt er_a1-1.htm 24 Ibid. 25 Ibid. 26 ‘Re:Think, Tax discussion paper’ page 51 http://bettertax.gov.au/files/2015/03/TWP_combined-online.pdf 20 AUSTRALIAN INCOME TAX RATES AND THRESHOLDS OVER TIME Threshold ($) Rate Threshold ($) Rate Threshold ($) Rate Threshold ($) Rate 1-5,400 0% 1-5,400 0% 1-5,400 0% 1-5,400 0% 5,401-20,700 20% 5,401-20,700 20% 5,401-20,700 20% 5,401-20,700 20% 20,701-38,000 34% 20,701-38,000 34% 20,701-38,000 34% 20,701-38,000 34% 38,001-50,000 43% 38,001-50,000 43% 38,001-50,000 43% 38,001-50,000 43% >50,000 47% >50,000 47% >50,000 47% >50,000 47% LITO $150 LITO $150 LITO $150 LITO $150 Effective TFT $6,150 Effective TFT $6,150 Effective TFT $6,150 Effective TFT $6,150 ML 1.4% ML 1.5% ML 1.7% ML 1.5% Threshold ($) Rate Threshold ($) Rate Threshold ($) Rate Threshold ($) Rate 1-5,400 0% 1-5,400 0% 0-6,000 0% 0-6,000 0% 5,401-20,700 20% 5,401-20,700 20% 6,001-20,000 17% 6,001-20,000 17% 20,701-38,000 34% 20,701-38,000 34% 20,001-50,000 30% 20,001-50,000 30% 38,001-50,000 43% 38,001-50,000 43% 50,001-60,000 42% 50,001-60,000 42% >50,000 47% >50,000 47% >60,000 47% >60,000 47% LITO $150 LITO $150 LITO $150 LITO $150 Effective TFT $6,150 Effective TFT $6,150 Effective TFT $6,882 Effective TFT $6,882 ML 1.5% ML 1.5% ML 1.5% ML 1.5% Threshold ($) Rate Threshold ($) Rate Threshold ($) Rate Threshold ($) Rate 0-6,000 0% 0-6,000 0% 0-6,000 0% 0-6,000 0% 6,001-20,000 17% 6,001-21,600 17% 6,001-21,600 17% 6,001-21,600 15% 20,001-50,000 30% 21,601-52,000 30% 21,601-58,000 30% 21,601-63,000 30% 50,001-60,000 42% 52,001-62,500 42% 58,001-70,000 42% 63,001-95,000 42% >60,000 47% >62,500 47% >70,000 47% >95,000 47% LITO $150 LITO $235 LITO $235 LITO $235 Effective TFT $6,882 Effective TFT $7,382 Effective TFT $7,382 Effective TFT $7,567 ML 1.5% ML 1.5% ML 1.5% ML 1.5% Threshold ($) Rate Threshold ($) Rate Threshold ($) Rate Threshold ($) Rate 0-6000 0% 0-6,000 0% 0-6,000 0% 0-6,000 0% 6,001-25,000 15% 6,001-30,000 15% 6,001-34,000 15% 6,001-35,000 15% 25,001-75,000 30% 30,001-75,000 30% 34,001-80,000 30% 35,001-80,000 30% 75,001-150,000 40% 75,001-150,000 40% 80,001-180,000 40% 80,001-180,000 38% >150,000 45% >150,000 45% >180,000 45% >180,000 45% LITO $600 LITO $750 LITO $1,200 LITO $1,350 Effective TFT $10,000 Effective TFT $11,000 Effective TFT $14,000 Effective TFT $15,000 ML 1.5% ML 1.5% ML 1.5% ML 1.5% 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 1998-99 1994-95 1999-00 2002-03 2003-04 2000-01 2001-02 1995-96 1996-97 1997-98 21 Threshold ($) Rate Threshold ($) Rate Threshold ($) Rate Threshold ($) Rate 0-6,000 0% 0-6,000 0% 0-18,200 0% 0-18,200 0% 6,001-37,000 15% 6,001-37,000 15% 18,201-37,000 19% 18,201-37,000 19% 37,001-80,000 30% 37,001-80,000 30% 37,001-80,000 32.5% 37,001-80,000 32.5% 80,001-180,000 37% 80,001-180,000 37% 80,001-180,000 37% 80,001-180,000 37% >180,000 45% >180,000 45% >180,000 45% >180,000 45% LITO $1,500 LITO $1,500 LITO $445 LITO $445 Effective TFT $16,000 Effective TFT $16,000 Effective TFT $20,542 Effective TFT $20,542 ML 1.5% ML 1.5% ML 1.5% ML 1.5% Flood levy>50,000 0.5% Flood levy>100,000 1.0% Threshold ($) Rate Threshold ($) Rate 0-18,200 0% 0-18,200 0% 18,201-37,000 19% 18,201-37,000 19% 37,001-80,000 32.5% 37,001-80,000 32.5% 80,001-180,000 37% 80,001-180,000 37% >180,000 45% >180,000 45% LITO $445 LITO $445 Effective TFT $20,542 Effective TFT $20,542 ML 2.0% ML 2.0% TBRL >180,000 2.0% TBRL >180,000 2.0% 2014-15 2010-11 2011-12 2012-13 2013-14 2015-16