Australia’s Rich Pay More Than Their Fair Share of Tax

Are you paying too much tax?

In Australia the top 1% earn about 10% of income & pay about 18% of taxes according to the author of this blog:

By: David Maywald , CFA

tax coin cash wallet growth rich money

In Australia the share of income going to the top 1% is about half the share of US income going to the top 1%.

Working from the estimates in ABS catalogue # 6554 the most recent wealth share of the top 1% in Australia is about 12.6%, which is much lower than Piketty’s figures of about 25% in Europe and 34% in the US.

This makes Australia more equal than Europe or the US have been at any time during the last two centuries of data relied on by Piketty.

The top 1% in Australia earn about 10% of income & pay about 18% of taxes, which is much more than their fair share of tax.

The share of income taxes paid by high earners has been relentlessly increasing over the last two decades (with the latest Australian Tax Office stats showing that in 2012 just 9% of the population paid 64% of all income tax & levies.)

Source : The Australian

Once again it’s the Baby Boomers

Over the last couple of decades, income inequality in Australia has partly been driven by Baby Boomers & the Lucky Few (born from about 1925-29 through to about 1942-45), who have significantly benefited from higher investment income out of their asset portfolios…

In the United States about 65% of net worth and financial assets are held by households with a head who is over 55 years old (while only 3% is held by households with a head who is less than 35 years old), and a similar concentration of wealth is present in older Australian households.

Aged couples in Australia also have some of the lowest poverty rates of any social group.

Aged couples in Australia

Labour income inequality has typically fallen in Australia (due to greater access to work & more participation in the workforce), while capital income inequality has typically increased during the last couple of decades (share prices and residential property prices have gone up by a large amount, particularly benefiting retirees and older households)…

Much of these accumulated savings in middle-aged to older households will subsequently be spent on health, accommodation and aged care.

These services are most often provided to poorer people by government, and sometimes by charitable and religious groups.

The net impact (as with progressive taxes & welfare) is to even-out the outcomes between wealthy and poor people.

The mandatory superannuation system in Australia has also led to less inequality of wealth distribution (ie a reduction in the net wealth Gini coefficient).

Importantly, all income deciles have seen real income growth in Australia from 1994-2012 (ABS Cat No. 6523.0), with the highest growth at P40 (two-thirds of the way down the income distribution, at the 40th percentile). This is a big contrast to the United States, and some other countries, where lower deciles in particular have seen real incomes fall.

Australia has aggressive redistribution of gross income, via taxes on high earners flowing into welfare and other benefits for low earners.

tax_return_360_18s4kr3-18s4ksiHouseholds in the highest quintile have 11 times as much gross income as households in the lowest quintile (ie before income tax & Medicare Levy), while disposable income is 5 times higher (ie after taxes & government benefits).

Households in the lowest quintile convert 88% of their gross income into disposable income, while households in the top quintile convert only 42% of gross income to disposable income (ABS 6523.0).

This partly explains the lower inequality & greater mobility in Australia, when compared to the Atlantic.

The equalising impact of Australia’s heavily-progressive income tax, and generous social welfare payments, is clearly demonstrated by the following calculations from the Australian Bureau of Statistics (in Cat No. 6537.0 on “Government Benefits, Taxes and Household Income”).

$24,472 per annum is paid in net taxes by each household in the highest quintile while $27,342 per annum is received by the lowest household quintile, essentially a direct transfer of $500 per week from one family to another:

Individuals in Australia pay no income tax on the first $18,200 of taxable income (lifted from $6,000 in July 2012).

At the same time as the tax-free threshold was trebled, the tax on superannuation contributions for high income earners was doubled (from 15% to 30%).

And more recently the highest marginal income tax rate has been lifted to 49% (including 1.5% for the Medicare Levy, 0.5% for the National Disability Insurance Scheme levy, and a further 2% for the “deficit levy”) taking effect from July 2014.

From July 2015 the tax-free threshold increases further to $19,400 in addition to the on-going Low Income Tax Offset (LITO) that benefit low income earners.

When the effect of all these measures is captured in the FY14 & FY16 stats, there will be a further substantial reduction in inequality, due to the tax/welfare system in Australia:

The extra 2.0% deficit levy (or “debt tax”) has hit income at the same time as the 0.5% NDIS levy, in July 2014.

These measures follow the 1.0% flood levy in FY12, 1.0% East Timor levy in FY01 (announced by never implemented), 0.2% gun buyback levy in FY97 and the Medicare Levy since 1984 (set at 1.0% initially, and then increased in 1986, 1993 & 1995)…

AMP and the National Centre for Social and Economic Modelling (NATSEM) have said that

“Australia’s means-tested tax and spending programs are so extraordinarily complicated that they cannot be easily summarised”…

The wide range of taxes and levies distract from the overall high level of income taxes paid in Australia, with the top marginal rate currently at 49% (half of any additional earnings are taken by the Tax Office).

This makes Australia the eighth-highest marginal income tax in the developed world, according to the Australian Financial Review

Over half of households in Australia either pay no income tax, or get back more in government benefits than they pay in tax… an unsustainable situation.

Quite apart from the large monetary transfers taking place (which continually draw the extremes toward the median), there’s also a very comprehensive public safety net of health, education, housing and other services provided by governments in Australia…

Together all of these things make Australia a much better place than the US to be in the lowest or second lowest quintile of income earners. Indeed, Australian households and individuals in the 5th quintile are better off than most places around the world…

An excellent 2013 Treasury paper on “Income Inequality in Australia” by Michael Fletcher and Ben Guttmann states that:

“Australia uses income-testing more than any other OECD nation, which allows for the greatest share of benefits to be targeted towards low income earners compared to any other OECD nation. The poorest 20 per cent of households in Australia receive 12.4 times the amount of cash benefits than the richest 20 per cent of households — the highest ratio in the OECD and about 50 per cent more than the next most targeted country, New Zealand (Whiteford 2013).”



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