Personal income tax changes

Budget Review 2016–17 Index

Les Nielson

What are the proposed changes?

Table 1 shows both the current and proposed personal income tax rates for Australian tax residents.

Table 1: Current and proposed personal marginal income tax rates, $p.a.
Current		From 1 July 2016
Taxable Income	Rate %	Taxable Income	Rate %
0–18,200	Nil	0–18,200	Nil
18,201–37,000	19	18,201–37,000	19
37,001–80,000	32.5	37,001–87,000	32.5
80,001–180,000	37	87,001–180,000	37
180,001 and over	45	180,001 and over	45

Sources: ATO[1] and Budget Paper No:2[2]

The above table does not include the Medicare levy and the two per cent Temporary Budget Repair levy for taxable incomes over $180,000.

Table 2 shows examples of tax payable at various income levels under both the current and proposed resident personal income tax rates.

Table 2: Tax paid, by gross taxable income, current and proposed tax rates, $ p.a.
Annual Income	Current Tax Amount	Proposed Tax Amount	% Change
20,000	342	342	-
60,000	11,047	11,047	-
100,000	24,947	24,631	0.013
190,000	59,047	58,731	0.005

Calculations by Parliamentary Library

Table 2 does not include the Medicare Levy and the Temporary Budget Repair levy.

As can be seen, the proposed personal income tax reductions for higher income earners are quite modest on an annual basis.

Those affected

The proposed changes will affect those in different personal income tax brackets. Table 3 shows the number of taxpayers, by their top marginal personal income tax bracket in 2013–14:

Table 3: Selected Personal Income Tax Statistics, 2013–14
Tax Bracket ($p.a.)	Number of Taxpayers	% of Total	Net Tax $m	% of Total Net Tax Paid
0–18,200	2,484,095	19.2	76	0.05
18,201–37,000	3,106,352	24.0	4,190	2.5
37,001–80,000	4,840,065	37.3	47,764	28.7
80,001–180,000	2,157,515	16.6	64,616	38.9
180,001 and over	376,267	2.9	49,551	29.8

Source: ATO Taxation Statistics[3]

The proposed changes would, on the basis of latest available figures, affect about 19.5 per cent of taxpayers in the two highest personal income tax brackets. These account for 68.7 per cent of personal income tax paid, based on 2013–14 figures. The government notes that this measure will ensure that around 500,000 taxpayers, whose top marginal rate is 37 cents in the dollar, will not be subject to the next highest tax bracket in the next three years.[4] The likelihood of this outcome will depend on wages growth, which is projected to be modest, at best.[5]

Proposed thresholds and inflation/average wage increases

The current personal income tax scales have remained unchanged since 2008–09. Since then the Consumer Price Index has increased by 18 per cent, and average weekly ordinary time earnings have increased from $1119.60 to $1500.50 in November 2015 (equivalent to about $78,026 per year); an increase of 34 per cent).[6] Taking into account that the current rates and thresholds have not changed since 2008–09 (setting aside the various budget repair and disaster levies) these figures underscore the extent of bracket creep since that time.

The economic impact

Prominent Australian economist, Professor John Freebairn has recently observed that:

Lower personal income tax rates provide incentives for a more productive economy and higher living standards through two main mechanisms. Lower marginal income tax rates increase the incentive for, and the rewards from, joining the workforce, working more hours, and putting more into education and skill acquisition. These incentives are especially important for women with children and older workers.

Also, lower personal income tax rates reduce distortions to household decisions on how much to save and where to invest savings in owner occupied homes, other property, financial deposits, shares, superannuation and other options.[7]

Doubtless the extent to which the above economic impacts occur depend on the size of the personal income tax cuts. Eventually, these impacts may reduce over time, while a corporate tax cut may produce longer lasting benefits (see Corporate tax rate reduction: large companies).

Savings verses consumption

An important influence on any boost that the proposed tax cuts give to the economy is what the taxpayer actually does with the additional disposable income. Overall, the household savings ratio has increased steadily since 1990.[8] Generally, it appears likely to be the case that higher income households will save rather than spend a tax cut.[9] To the extent that this occurs, it limits any immediate economic boost from a personal income tax cut.

[1] Australian Taxation Office website, Individual income tax rates

[2]. Australian Government, Budget measures: budget paper no. 2: 2016–17, 2016, p.42.

[3]. Australian Taxation Office, Taxation Statistics 2013-14, Summary-Table 5.10, Number of Individuals and Net Tax, by Tax Bracket, 2013-14 Income Year.

[4]. Budget paper no. 2 2016–17, op. cit., p. 42.

[5]. Australian Government, Budget strategy and outlook: budget paper no. 1: 2016–17, 2016, pp. 1-7.

[6]. Figures sourced from Monthly Statistical Bulletin, Parliamentary Library, Canberra, 2016.

[7]. J Freebairn, ‘Explainer: how company versus personal tax cuts boost the economy’, The Conversation, 21 March 2016.

[8]. A Duncan and R Cassells, ‘Australians are saving more, but are more comfortable with debt’, The Conversation, 17 June 2015.

[9]. R Finlay and F Price, ‘Household saving in Australia’, Research Discussion Paper, 2014-03, Reserve Bank of Australia, April 2014; L Berger-Thomson, E Chung and R McKibbin, ‘Estimating marginal propensities to consume in Australia using micro data’, Research Discussion Paper, 2009-07, Reserve Bank of Australia, November 2009.

All online articles accessed May 2016.

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