Update at the bottom of the page!



Have a guess how much tax the top and bottom 20% of Australian households pay as a percentage of their gross income. You might be surprised.

One of my greatest issues with much of the commentary on Australian tax reform is that those pushing for reform ignore the cost burden placed on lower income households by indirect taxes such as excises on fuel, tobacco and alcohol, stamp duties, GST and other government charges.

In 2009-10 the lowest quintile (the bottom 20%) of households in Australia had an average gross income of $606 per week, made up of private income and social assistance payments. During that same period those households faced an average $106 in overall taxation, for an effective tax rate of 17.5%.

For the highest quintile the average income was $3665 with the average overall tax being $1029, for an effective tax rate of only 28.1%.

(Note: Income includes government benefits received too. I’ll whack a table up soon with this data!)

How on earth is that fair? How on earth does that live up to the notion that Australia is an egalitarian society, one that looks after all its citizens regardless of their inherited privilege?

This clearly demonstrates that the progressive nature of Australia’s income tax code is quickly counteracted by large regressive and indirect taxation. For the most vulnerable and lowest income members of society to be paying an effective tax rate that is almost 2/3 that of the highest income earners clearly isn’t sustainable if we value a reduction in inequality and expanded opportunities for all citizens.

This makes calls by Federal Liberal MP Dan Tehan, among others, calling for the GST base to be broadened seem even more problematic. Aside from the obvious A tax on fresh food, education and healthcare is fine but a modest price on carbon will ruin the economy, you also have to consider whether these policy statements are an attempt to install an effective flat tax system in Australia.

If you’re looking for decent tax revenue measures that actually address structural problems in Australia’s taxation system then the Henry Tax Review recommendations are a good place to start. Remove tax concessions and random excises unless there is a specific policy reason to have them in place.

An excise on tobacco consumption can be justified because it acts as a financial disincentive to consume a harmful substance whereas a tax on payroll serves as a disincentive to employ additional workers. Recommendation 51 – 51 of the Henry Tax Review are particularly sexy. Get rid of stamp duties that serve only to limit transactional commerce and consumption and replace them with land taxes. There are a few basic tax reform ideas that should be a higher priority than GST reform. Once you’ve got tax concessions under control and a more equitable tax system than we can chat about charging more for fresh food.

Lowest Quintile Second Quintile Third Quintile Fourth Quintile Highest Quintile All Households Gross Income $606.00 $1,061.00 $1,550.00 $2,125.00 $3,665.00 $1,790.00 Income Tax $1.00 $58.00 $167.00 $317.00 $756.00 $260.00 Total Taxes (direct + indirect) $106.00 $207.00 $348.00 $533.00 $1,029.00 $443.00 Effective Tax Rate 17.50% 19.50% 22.50% 25.10% 28.10% 24.70%!

UPDATE:

/u/in_trouble_again (via Reddit) suggested that an increase to the GST on fresh food would disproportionately effect low income earners. They are 100% correct!

The basics of it are this:

Lower income households allocate a greater amount of their resources to consumption of basic goods and services. Therefore, any increase in indirect taxes such as the GST on these products would disproportionately affect lower income earners.

The chart below shows the percentage of a households income devoted to each category of consumption.

You can clearly see that lowest income earners spend a greater proportion of their household income on food and non-alcoholic beverages, and medical care and health expenses than the highest do.

So what if a 10% GST was applied to fresh food?

If we use the conservative estimate that the bottom quintile spend $100 per week on fresh food that their effective tax rate would increase from 17.5% to 19.1% (+1.6%)

If we then assume that the highest quintile spend four times as much at $400 per week their effective tax rate would increase from 28.1% to 29.16% (+1.06%)

Again. You’re hitting the most vulnerable in society harder than you think. No GST reform without comprehensive tax reform please!

As this is my first blog post please send any feedback to theausrepublic@gmail.com

NOTES:

* The Household data i’ve used is based on the Equivalised (HIED) model. Put simply: The average household controlled for differing size and composition

http://www.abs.gov.au/ausstats/abs@.nsf/0/A390E2529EC00DFECA25720A0076F6C6?opendocument