Tax relief and how our rates stack up

Now that the federal government’s $140 billion tax package has navigated the Senate’s tricky shoals and into law, hard-working Australians can feel a lifting of the weighty fiscal burden from their collective shoulders.

Or a slight twinge of relief, more likely: Treasurer Scott Morrison’s Seven Year Plan delivers a cut to average PAYE wage earners of $530 for the 2018-19 year, payable as a tax offset when they lodge their tax returns after June 30 next year.

These savings amount to $10.19 a week, or, as the Opposition unkindly referred to it, barely enough to buy a burger and a milkshake (echoing Howard-era minister Amanda Vanstone’s famous remark that tax cuts in 2003 would have been barely enough to buy a sandwich and a milkshake.)

As for high income earners, they have to wait until July 2024 for a more substantial cut of $7225. But if a week in politics is a long time, seven years is an eternity: there are elections to come, not to mention that Labor has pledged to rescind all but the immediate 2018-19 cuts if it wins government.

But are we an overtaxed population in the first place?

“I always approach claims we are a low or high taxed country with a fair bit of scepticism because of complications that really matter,” says The Tax Institute’s senior tax counsel Robert Deutsch. “We don’t have any state income taxes (such as in the US) but other countries do. We also have capital gains (tax) – albeit concessional – while NZ, Singapore and Hong Kong don’t have CGT at all.”

In the 2017-18 year our “headline” top marginal tax rate (MTR) stood at 45 per cent (plus the 2 per cent Medicare levy) with this rate kicking in above $180,000 of income.

Under the government’s seven-year plan, the second highest 37 per cent tax rate bracket is abolished in July 2024, with all taxpayers earning less than $200,000 paying a top rate of 32.5 per cent. The 45 per cent rate would continue to apply for earnings beyond that threshold.

According to the OECD, Australia’s top MTR is actually on par with the UK, where earnings over £150,000 are taxed at 45 per cent.

In the US, the Trump tax cuts mean the top marginal rate stands at 37 per cent this year for individuals earning over $US500,000. But extraneous imposts, including a social security tax and state taxes (as high as 13 per cent in California) take the real US MTRs much higher.

But we’re being punished compared with Hungarians and Czechs who under a flat-rate system pay no more than 15 per cent of their hard earned forints and korunas to the taxman. Closer to home, Singapore has a top MTR of 22 per cent, Hong Kong 15 per cent and New Zealand – a country known for socially progressive attitudes but not low taxation -- caps out at 33 per cent.

There’s always someone worse off, too: the Swedes and the Danes are taxed a maximum 60.1 per cent and 55.8 per cent respectively.

Still, our top MTR can be seen as onerous as it kicks in relatively early, at 2.2 times the average Australian wage of just over $83,000 a year. In the US, post the Trump tax cuts the highest MTR now doesn’t apply until eight times over the average wage of around $US50,000.

Over the (planned) wall in Mexico, high-flyers are not bothered with the top 35 per cent rate until they earn 25 times the average toiler’s wage of 118,203 pesos a year ($8200).

At the other end of the scale, Swedish workers need to earn only 1.5 times the norm of 434,858 kronas ($65,000) to enter the 60 per cent MTR bracket. And while the Hungarian and Czech MTRs might be the OECD’s lowest, they kick in immediately.

In the US, the lowest MTR of 10 per cent applies to the first dollar earned up to $US9526, after which a 12 per cent rate applies. The Brits are more forgiving, allowing a £11,851 threshold before the lowest 20 per cent MTR comes into play.

According to Prof Deutsch, a more effective measuring stick is the ETR: the effective tax rate, or overall percentage of earnings that workers tithe to the taxman.

In 2017-18, a single Australian taxpayer on $80,000 a year paid $19,147 of tax excluding the 2 per cent Medicare levy, an effective rate of 23.93 per cent. In 2018-19 this falls to $18,617, or 23.27 per cent, and then $18,607 (23.26 per cent) in July 2024.

Those on $180,000 paid $57,832 last year (32.13 per cent), falling to $57,697 (32.05 per cent) this year and $53,107 (29.5 per cent) in 2024.

Prof Deutsch’s sums serve to refute the notion that because they will be on the same 32.5 per cent top MTR, a taxpayer on $180,000 would be paying the “same” tax as $80,000-a-year Joe and Jane Average.

The other aspect to global comparisons is that many Australian workers reduce tax through concessions – such as negative gearing– or won’t pay any net tax at all when social security concessions are taken into account.

“We have a high headline rate but most people don’t pay it,” CPA Australia’s head of policy Paul Drum says. “The high MTR cuts in at a low level, but most people would never get there. You can go even further and say many people don’t pay anything (because of welfare benefits such as the Part A and Part B family tax benefits).”

Prof Deutsch argues that when individuals see around half of their extra earnings taken by the taxman, that’s when the motivation to work harder dwindles. That’s why The Tax Institute formally advocates a maximum 40 per cent top MTR.

Otherwise, Australia looks to be as middling a player in the global tax league as it is in world soccer.

If we are overtaxed – and the debate is ongoing – at least the taxman is not cramping our joie de vivre: last year’s United Nation’s World Happiness report ranked the “heavily taxed” Australia, Denmark and Norway as among the ten most joyous countries.

All in all, there’s plenty of food for thought for taxpayers as they scoff on their burger-and-milkshake windfall.

 
The views expressed are those of the author and do not necessarily reflect those of the Westpac Group. This article is general commentary and it is not intended as financial or tax advice and should not be relied upon as such.