Brian Lawrence. Bracket creep and income tax priorities in the May 2016 BudgetApr 20, 2016
The May 2016 Budget will frame a political narrative about rising average incomes over recent years and the budgetary measures that will ensure that the trend will continue in the next year and beyond. This will occur despite the impact of cuts in Government expenditure over a range of services and cash benefits.
There are two past Budget documents that summarise this kind of narrative in average living standards over the past two decades:
- The last Budget of the previous Coalition Government in May 2007 provided a summary of the actual and projected improvements in real disposable incomes over the period 1996-97 to 2007-08, which was the period of Coalition Government. For the single person on Average Weekly Ordinary Time Earnings (AWOTE), the figure was 25.6%; see 2007-08 Budget Overview, Appendix A, Higher household incomes. In effect, this was the claim for the Coalition years.
- The last Labor Budget in May 2013 provided a summary of the actual and projected increase in real disposable incomes over the period 2007-08 to 2013-14. For the single person on AWOTE, the figure was 11.8%; see 2013-14 Commonwealth Budget Overview, Appendix C, Helping households with the cost of living. In effect, this was the claim for the Labor years.
What these figures hide, and the 2016 Budget narrative will also most likely hide, are the respective contributions that wages and the tax system have made to the improvement in the living standards of middle income earners; and the position of those who have fallen behind in these periods of national economic growth. They also hide substantial increases in income inequality affecting large pockets of the population; and they fail to disclose the impact that the tax system is having on income inequality after tax rates are taken into account.
In the fifteen years since the commencement of the new tax scales which accompanied the introduction of the GST in 2000, AWOTE increased from $798.80 to $1,499.30 per week (November 2000 to November 2015), a very healthy 87.7%; and a figure well in advance of the CPI increase of 48.3% (December 2000 to December 2015).
That figure of 87.7% is a key figure for the understanding of the current debate about bracket creep.
Bracket creep has happened when you find that you are paying a higher proportion of your income in income tax, even when your income has moved by the same percentage as other taxpayers. Bracket creep helps the Federal Budget when the percentage collected from income tax on wages rises faster than average wages.
The period January 2001 to January 2016 has seen some major changes in the income tax system. A comparison between the two dates allows us to compare the impacts of those changes on different income groups; and to consider who has benefited most from a period which has produced claims of structural imbalances in our tax system.
We must be careful, however, to exclude the effect of the increase in the Medicare Levy on 1 July 2014, from 1.5% to 2.0%, to fund the National Disability Insurance Scheme. The following figures exclude the Medicare Levy.
Over the past 15 years the net income from the AWOTE wage has fallen from 78.7% to 78.3% as a result of changes in tax rates and thresholds. This represents a loss of $5.92 per week.
How have higher income groups fared under the successive tax changes of the last 15 years?
Consider the position of the taxpayer now on $150,000 per year (almost double AWOTE) who has also received the same 87.7% increase received by the AWOTE employee. This taxpayer is now paying 30.0% of his or her income in income tax, down from 31.2% in 2001. This represents a tax cut of $64.26 per week.
For the taxpayer on $300,000 per year who has had the same increases as AWOTE over the past 15 years, the percentage of tax paid has fallen from 39.1% in 2001 to 38.3% in 2016, even after the imposition of the Budget Repair Levy of 2.0% of taxable income in excess of $180,000 per year. This is a tax cut of $46.82 per week.
The Budget Repair Levy is a temporary measure introduced by the Tax Laws Amendment (Temporary Budget Repair Levy) Act 2014 and associated legislation, and applies in the financial years 2014-15, 2015-16 and 2016-17.
Without the Budget Repair Levy (of $6,000 per year) the taxpayer on $300,000 per year has had a tax cut of $161.81 per week.
These high income earners, who have been paying the top marginal rate right through the last 15 years, have benefited from tax threshold changes and tax rate changes for lower incomes, but they have also had the benefit of a fall in the top marginal rate from 47% to 45% during these 15 years. Once the Budget Repair Levy is removed, from 2017-18, the tax cuts for the taxpayer on $300,000 per year will return to $161.81 per week. For every $100,000 above that figure, the tax cut will be $2000 per year or $38.33 per week.
Higher income earners have done rather better than the average increase in AWOTE. For example, the Fair Work Commission has estimated that, over the decade 2004-14, the real earnings of full time adult non-managerial workers at the 90th percentile increased by more than 10 percentage points over the real increase in the mean earnings of full time adult non-managerial workers; see Chart 8.2, Statistical Report, 18 March 2014.
At the other end of the income scale is the worker who depends on the National Minimum Wage (NMW) of $656.90 per week. Over the past 15 years the successive wage tribunals have increased the NMW by 64.1%, well short of AWOTE. Tax cuts at the lower income levels have offset some of this loss. For the NMW worker, the percentage of income tax paid has fallen from 12.7% to 8.9%, which is amounts to a tax cut of $24.89 per week.
There is an economic case in support of the reduction in income tax on NMW workers: income tax on the NMW effectively raises the costs of employment and, to the extent that wage levels impact on employment, amounts to a tax on employment. There is good reason for the progressive reduction of income tax to zero at the NMW level. Australia has moved in the right direction, but more is needed.
Even with this tax cut, the NMW worker is still a long way behind the average worker. The NMW and other minimum wage rates have failed to keep up with average wage increases. In 2001 the net wage of the NMW worker was 56.3 % of the net wage of the AWOTE worker. In 2016 the net wage of the NMW worker had fallen to 51.0% of the AWOTE worker, illustrating the increasing inequality of the Australian workforce over the past 15 years. The position is worse for a worker on the base minimum rate set for a trade-qualified worker. That rate (commonly referred to as the C10 rate) has fallen from 65.9% to 58.6%. The Fair Work Commission needs to address the gap between award wages and community wages.
Since the tax scales were last adjusted for the 2012-13 year, the proportion of tax paid by NMW workers has increased from 8.1% to 8.9%. To eliminate this bracket creep, a tax cut of $5.33 per week is needed.
The May 2016 Budget should give priority to relieving the bracket creep which has been suffered by low and middle income workers. Compensation for bracket creep is not a real tax cut. There will be no real tax cuts unless bracket creep is removed and the failure to do so will amount to a tax increase. In bringing about a fair outcome, it is clear that the very advantageous position of high income earners, even with the Budget Repair Levy, should be taken into account in the May 2016 Budget and, furthermore, unless and until the bracket creep suffered by low and middle income earners is remedied, there is a case for continuing the Budget Repair Levy on higher income earners beyond 2016-17.
Wage increases and changing taxation rates
January 2001 – January 2016
Notes: The Medicare Levy is not included. The figures are calculated on 52.18 weeks per year.
Tax rates 2000–01
|Taxable income||Tax on this income|
|$6,001–$20,000||17 cents for each $1 over $6,000|
|$20,001–$50,000||$2,380 plus 30 cents for each $1 over $20,000|
|$50,001–$60,000||$11,380 plus 42 cents for each $1 over $50,000|
|$60,001 and over||$15,580 plus 47 cents for each $1 over $60,000|
Average Weekly Ordinary Time Earnings, $41,681 per year: tax, $8884.30
$79,914 per year: tax, $24,939.58
$159,829 per year: tax, $62,499.63
Federal Minimum Wage (now the National Minimum Wage) $20,893 per year: tax, $2,647.90
Tax rates 2015–16
|Taxable income||Tax on this income|
|0 – $18,200||Nil|
|$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|
Average Weekly Ordinary Time Earnings, $78,233 per year: tax, $16,972.72
$150,000 per year: tax, $43,447
$300,000 per year: tax, $108,547.00, plus Budget Repair Levy, $6,000.00
National Minimum Wage, $34,277 per year: tax, $3,054.63
Since 2003, Brian Lawrence has been drafting submissions for the National Wage Reviews on behalf of an agency of the Australian Catholic Bishops Conference, the Australian Catholic Council for Employment Relations. He is an editor of an e-book, Working Australia, 2016; Wages, Families and Poverty.