Ross Greenwood speaks to Robert Deutsch, from the Tax Institute of Australia, about more than 40% of lower income households receiving more in government payments than they’re paying in income tax.
Introduction: Aussie households receiving more in benefits than dishing out in taxes
Ross Greenwood: Great to have your company here on Monday news going right around the country on Monday May 14, 2018. When the budget came down last week, we spent a bit of time trying to tell you about the government’s tax plan. As you’re well aware, what the government is going to do is basically add a new tax offset which will actually give some immediate tax relief to those people earning under $87,000 and ultimately $90,000. With offsets, generally, that means you can target the money, the particular income people on income levels get.
Say for example you want people under the average wage, the average wage in Australia is broadly around $80,000, you can do that with an offset, but if you give a tax cut that broadly gives those people some relief, that goes all the way up the system. Then the government more aggressively, creatively, and I think probably sensibly wants to do something that we’ve talked about plenty of times, that is, take out the 37 cents a dollar tax bracket that currently kicks in at $87,000. In other words, you get your income, you’re on 32 cents a dollar, you hit the $87,000, you’re on a dollar after that, and you just have to pay 37 cents on a dollar.
That makes sense. That goes all the way up at the moment to about $190,000. What the government is basically saying is, “By 2024, we’re going to only have the one bracket between $40,000 and $200,000 and that’ll be 32 cents to the dollar.” The Labor Party has come out and said this isn’t right because that means a person on $40,000 or less is paying the same as a person who is actually sitting out there close on $200,000. Today, it was interesting to note that Peter Costello hadn’t picked this up, but he said, “That’s not right.” Because, of course, the person ends up paying more the more they pay.
Professor Bob Deutsch, the Senior Tax Counsel at the Taxation Institute of Australia has actually crunched the numbers, and it is instructive to note that even though you might earn more money, you actually do pay, not only considerable more tax in dollar terms but also in percentage terms as well. Bob, good evening to you. How are you?
Interview with: Robert Deutsch, Senior Counsel, Tax Institute of Australia
Bob Deutsch: Good, thanks, Ross, great to be with you.
Ross Greenwood: Okay, let’s go to the current situation. Let’s take a person and let’s get our person on $50,000 because you have your chart in front of you, I know this. How much tax is a person today pay if they’re on $50,000 a year?
Bob Deutsch: This takes into account the Medicare levy and the current low-income tax offset. Just be aware of that, it takes into account both those things. The figure that I’ve worked out is $8,547 on the $50,000 which basically translates to an overall rate of just over 17%.
Ross Greenwood: 17%, okay. The person pays 17% tax if they’re earning $50,000. All right, let’s go all the way up to a person who is on $200,000 today, how much tax do they pay?
Bob Deutsch: Again, taking into account the Medicare levy and this time, of course, at $200,000, they don’t get any low-income tax offset whatsoever. $67,232 which translates into a tax rate, this is the average tax rate, is 33.62%.
Ross Greenwood: In other words, they pay in percentage terms almost double a person who is on $50,000?
Bob Deutsch: That’s correct.
Ross Greenwood: Let’s throw ourselves out to the government’s plan beyond July 2024 because let’s see whether the tax cuts have a significantly different impact on those two. A person again on $50,000, how much tax will they pay?
Bob Deutsch: They pay a bit less, $8,007, so they’ve got a $540 reduction in the tax there. That translates into percentage terms a shade over 16%.
Ross Greenwood: Then the Labor Party, as you would have heard, says they’re only getting a $540 tax cut, so that doesn’t seem right because when we go ahead to $200,000, what would they actually pay at that time?
Bob Deutsch: They’ll be paying $60,007, so let’s just call it $60,000 which translates to an effective tax rate of 30%.
Ross Greenwood: Close on double, so about the same as it is currently. Close on double what the person on 50,000 earns, but what that person does is over this period of time, they would actually pay $7,200, give or take, less as a result of the changes in the government’s plan. The Labor Party would say that’s not fair because the person who was earning $50,000 should be getting a bit more of that $7,000 that that person on $200,000 is paying. That’s the argument that goes, isn’t it?
Bob Deutsch: That is the argument, but the point that you made earlier that there is some suggestion that the person on $50,000 is paying much the same tax rate as the person on close to $200,000 is just not right.
Ross Greenwood: That’s right, that’s it. You’d understand that because of the sliding scales and because of the first, well, $18,000 currently, but eventually going to be $20,000, is going to be tax-free, and there’s a bigger impact on somebody earning $50,000 as it does somebody earning $200,000.
Bob Deutsch: Exactly. That’s right.
Ross Greenwood: Then you get to the next phase of this. What it would appear is under the labor plan that they want to keep all the tax scales in place that also what they’ve got is that they want to give these offsets to try and give more money to those people on those lower incomes. Notwithstanding the fact, as we’ve said before, remember? That 40% of households, generally lower-income households, actually are net beneficiaries in terms of the money that they receive back from the government.
They’re basically receiving more back from the government than they’re paying out in tax, so a person on $50,000, for example, is more likely, if they’ve got a family, to be actually receiving more money back from the government than what they’re paying out in that current amount of tax of around about $8,000 or so.
Bob Deutsch: That’s true. That’s a point that I’ve made before, but it seems to be a little bit lost on the Labor Party at the moment, but I certainly agree with that sentiment, it seems to be spot on.
Ross Greenwood: The second part about this which Peter Costello did point out vigorously today, is if you don’t change your top marginal tax rates or give more incentive to those people at the upper end, then you’re going to be ultimately taking more burden of tax off lower and middle-income earners and you might say that’s fair or not fair, whatever you can say, but what you’re going to do is put more burdens on those people at the higher end of the tax scales. If you do that, ultimately, those people might decide, even with an effective rate of tax of 30%, that they might find other ways of being taxed. In other words, taking their skills, going overseas and being taxed in Hong Kong as Peter Costello said at 15%.
Bob Deutsch: Absolutely, and it’s not just Hong Kong, you only have to go to New Zealand where the maximum marginal tax rate is significantly lower than ours.
Ross Greenwood: In other words, this is about competition and about people’s willingness to work under the varying tax regimes, but the one thing we’re trying to point out to people here is, just because you earn a lower income, does not mean that you are necessarily paying a higher rate or indeed paying as much tax as a person who’s earning $200,000, $180,000, $160,000 or even $100,000 for that matter.
Bob Deutsch: Absolutely, you’re not paying the same amount and you’re not paying the same effective average rate, and I think that’s what people have to look at. They have to look at the effective average rate rather than the marginal rates. That’s what we’ve been working on to try and demonstrate that it is a progressive system. Even under the coalition’s plan post-2024, it will be a very progressive system, but it will give rise to better outcomes than the current tax system.
Ross Greenwood: I’ll give you another small example of this if people want to just stick this in your head. A person on $50,000 as compared with a person even on $100,000, the person on $100,000 pays almost three times as much tax as a person on $50,000 even though they earn only twice as much. Think your way through that one as well, Bob. Because that means, technically, if it was fair, when you earn $100,000, you should only pay twice as much tax because you only earn twice as much income. It doesn’t work that way, that’s not the way our tax system works.
Bob Deutsch: No, absolutely. I can give you the figures for that, $50,000 will pay just over $8,000, and on $100,000, you just pay over $25,500. That’s three times more.
Ross Greenwood: There you go, that’s three times more. That is the way in which the tax system works. Professor Bob Deutsch is the Senior Tax Counsel at the Tax Institute of Australia. As I say, when people come up to you and say, “The rich are getting away with it and those people on high incomes and we should be giving it all to middle and low-income earners.”
The answer is, ultimately, somebody has to pay the tax. Somebody’s going to be a neat payer of tax. The problem right now is, as I say, 40% of households, remember, get more from the government than what they pay out in tax, and that’s something that every one of us has got to stop and think about.
Professor Bob Deutsch certainly has and as I say as always, Bob, we appreciate your time.
Bob Deutsch: Thanks very much, Ross.
Interviewed Bob Deutsch, Senior Tax Counsel, The Tax Institute titled ” What do the Paradise Papers reveal? .”
Interviewed Professor Deutsch, Senior Tax Council, Tax Institute titled ” The new world of superannuation .”
Interviewed Professor Deutsch, Senior Tax Council, Tax Institute titled ” Tax tips for the end of the financial year .”
Image source: 2GB