It’s never good if you start wondering if the treasurer really understands how Australia’s taxation system works. And yet we have reached that point. On Monday, for the second time in six months, Joe Hockey incorrectly suggested Australians pay half their income in tax. It is an error so egregious that it suggests he either doesn’t understand how income tax works, or that he is purposefully misleading the public.



Last year Joe Hockey had a terrible August. On the fourth of that month, on the Today Show, he erroneously suggested as a “fact” that “higher income households pay half their income in tax”. A couple weeks later, when he got himself into trouble over his statements that poor people don’t drive cars, he also revealed his ignorance of progressive taxation – whereby the percentage of income paid in tax increases with your income.

Given the government hopes to make taxation reform a high priority this year with its review of the tax system to be announced soon, you would think an adviser would have told him to get his act together over the summer holidays.

Joe Hockey repeats incorrect claim that half of people's income goes on taxes Read more

And yet Hockey has started 2015 by continuing to be a major liability for a government desperate to gain some economic credibility.

On Monday, in his first interview of the year, he repeated his claim that Australians pay half their income in tax. He told Neil Mitchell on 3AW that “Australians spend the first six months of the year working for the government with tax rates nearly 50 cents in the dollar.”

Once again the treasurer – the man in charge of our taxation system – revealed his ignorance of how income tax works. In an effort to argue our tax rates are too high he suggested, “You’re working July, August, September, October, November, December just for the government and then you start working for yourself”.

It’s a nice soundbite. Unfortunately it is completely and utterly wrong.

That Hockey even thinks such a fraudulent point is worth uttering, however, displays that his concerns about taxation are targeted towards the most wealthy in Australia, rather than the vast majority.

Australia’s income tax system is a progressive one. We pay higher rates of taxation the more we earn. There are five tax brackets:

$0 - $18,200 – 0%

$18,201 - $37,000 – 19%

$37,001 - $80,000 – 32.5%

$80,001 - $180,000 – 37%

$180,001 + – 45%

In last year’s budget the government added a (temporary) 2% debt levy for those earning over $180,000, so in effect the top tax bracket is now 47%.

Into this mix we also add the Medicare levy. This is now 2%, and it applies to all of your income. So if you earn $200,000 you pay 2% – $4,000 – on all of it.

The difficulty with the Medicare levy is that, unlike income tax, the threshold at which you must start paying the levy is dependent upon whether you have a partner, what your combined income is, and whether you have any dependent children.

But for single people without children the threshold to start paying 2% is $24,167.

So if you add that 2% to the 47% of the highest tax rate you can almost understand why Joe Hockey would suggest we pay nearly 50%.

But the problem for our Treasurer is that you don’t pay 47% income tax on your whole income – only on the income earned over $180,000. So if you earn $200,000, you would pay 47% tax on just $20,000 of your income - $9,400. The rest of your income is taxed at the lower marginal rates.

It means the average amount of your income you pay in tax is much lower than the highest marginal tax rate you pay:

For example, someone who earns $50,000 a year, even though they are in the 32.5% tax bracket, only pays an average of 17.1% of their income in tax. If you earn $100,000, although you are in the 37% tax bracket, you only pay around 27% of your income in tax.

And even for the very wealthy – say someone on $250,000 – you don’t pay “nearly half” of your income in tax, but rather on average 36.9% – and that is not taking into account deductions and other tax minimisation measures which may lower the amount of tax you pay.

But how many people even pay that much?

The most recent tax statistics from the ATO showed that only 2.3% of people who earned an income in 2011-12 earned over $180,000. Ben Phillips, of the National Centre for Social and Economic Modelling, suggests it would now be around 3.5%.

It offers some insight into Joe Hockey’s priorities that when he talks about tax. Not only does he distort the amount people pay, but his focus is on a very small percentage of the population – the wealthiest.

But if we break down taxpayers into lots of 10 according to how much they earn, we can get a good idea of what most Australians pay:

In 2011-12, the richest 10% – those who earn over $110,000 a year – paid on average around 32% in tax. This includes the top 1% who earn on averaged $611,000 a year. But even that minute segment of the population paid just 39.5% of their total income in tax – well below Hockey’s “nearly half” amount.

By contrast the middle income earners in the fifth and sixth deciles paid just 14% and 17% of their income in tax.

In 2011-12, the median taxable income of taxpayers was around $49,700. People earning that amount paid on average 15.6% of their income in tax.

Rather than meaning they had to work “July, August, September, October, November, December” for the government, it meant they had to work just 57 days. Or from 1 July to 26 August in the financial year.

Hockey seems to be talking about as accurately on tax as he would be if he were asked about who he would vote for in Triple J’s Hottest 100.

Politicians often make mistakes with tax and other economic statistics. Usually they are errors remembering specific figures. In 2007, then opposition leader Kevin Rudd incorrectly said the top tax threshold was $175,000 instead of $150,000. Peter Costello told parliament it meant Rudd did “not understand” the taxation system and that “he should never be put in charge of people’s mortgages, their businesses or their jobs”.

In 2010, on the Sunrise program, Rudd again made a mistake when he suggested the tax free threshold was “from memory, it’s about $12,000 or $15,000”, instead of the then $6,000.

Hockey attacked Rudd, saying it was “disturbing that the prime minister himself doesn’t fully understand the tax system that he’s supposedly wanting to reform”. He concluded that “if you want to have a debate about tax reform, at least get your numbers right first”.

It’s time for Hockey to listen to his own advice. He needs to either learn how the system works, or stop deliberately misleading the public. Until he does so, anything he has to say about reforming the tax system deserves to be ignored.

--

A few comments in response to this post have suggested Hockey was talking about all taxes such as the GST and stamp duty, and not just income tax. I disagree – clearly his comments were in the context of income tax, given he was referring to bracket creep, and indeed because the question he was answering from Neil Mitchell referred to “income tax”.

But let’s be generous and say he was, does this make his statement now correct? Alas, no.



The ABS has data for taxes paid by households for 2009-10 (the more recent 2011-12 figures for household incomes only includes taxes on income and not GST).



It shows that the median weekly income including all pensions and direct welfare benefits was around $1,497. These households paid $161 a week in income taxes, and $174 on all other taxes – of which $60 was on GST.

The richest 20% of households paid $731 in tax on their $3,655 a week income and a further $275 a week on other taxes (including just $103 on the GST)

This works out to median households paying about 22% of their income in taxes and the richest 20% paying about 27%.

Now this uses different data than the ATO data I have used – it’s from a survey rather than actual tax returns.

But it suggests that the amount of non-income tax households pay is about an extra 10% of their income. So even using my much higher figures from the ATO for how much income tax we pay, we still don’t get close to 50% of total tax for any group – especially as the higher your income, less of a percentage is paid in non-income tax.

So no, we don’t work half of the year for the government.