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Budget 2017: A tax rate of 49.5 per cent: What would it mean for Australia?

May 13, 2017

Budget 2017: A tax rate of 49.5 per cent: What would it mean for Australia?

Eryk Bagshaw, The Sydney Morning Herald, 12 May 2017

A permanent tax rate of almost 50 per cent for the highest-earning Australians is on the cards as the government looks to negotiate with Labor and the Senate crossbench to fully fund the $22 billion National Disability Insurance Scheme.

Labor’s federal budget reply, released on Thursday, would see people earning more than $180,000 permanently face a 49.5 per cent tax rate, including the 0.5 per cent increase in the Medicare levy announced by the Turnbull government and make permanent a 2 per cent “temporary budget repair levy” that the Coalition is determined to expire on June 30.

On Friday, Treasurer Scott Morrison attacked Labor leader Bill Shorten for “failing to come to the middle ground,”as the government looks to shape negotiations with the Senate crossbench.

“It’s very disappointing that [he] has chosen to play politics with this. It’s not our first preference to do it this way, we tried to do it with savings,” Mr Morrison said.

“To slog your guts out and at the end of the day you have to work one day for the government and one day for yourself, it’s a jobs killer and an innovation killer.”

How much tax do you actually pay?

While the Treasurer’s comments suggest a 49.5 per cent permanent tax rate would mean half a person’s pay could go to the government and half towards the family budget, the Australian Tax Office’s own figures show that at the current temporary rate of 49 per cent, someone earning $190,000 is taxed at 31 cents for every dollar, while even the wealthiest 0.1 per cent of Australians earning more than $1 million a year are taxed at 42 cents.

Australia’s tax-free threshold means that no one pays tax for the first $18,000 they earn, before the rate of tax goes up progressively according to income.

A person earning $1 million is not taxed anything for the first $18,000, 19 cents in each dollar over that amount up to $37,000, 32 cents for each dollar over $37,000 and 37 cents for each dollar over $87,000.

A jump to 49.5 per cent from the current temporary 49 per cent would mean an increase of less than $317 a year in tax for someone earning $200,000 a year.

Australia v the world

The system means that when compared against other countries in the OECD, Australia’s average personal income tax rate remains largely in the middle of the pack, significantly below Scandinavia but still ahead of Britain and the US, where further income tax falls are tipped to occur.

France’s income tax rate of 53 per cent kicks in at €152,000 [$A225,310], Germany’s 47.5 per cent tax rate at €57,000 [$83,000], the US at 33 per cent from $US190,000 [$257,322] and Britain at 45 per cent from £150,000 [$261,919].

Deloitte Access Economics partner Chris Richardson said if Labor’s proposed increase were negotiated with the crossbench it was likely to mean an outflow of workers who hope to earn more than $180,000, but not in significant numbers.

“In terms of the top end, three years ago it was 47 per cent and they were told it was going to be temporary,” he said.

‘Horrendous politics’ to come

Mr Richardson warned that Australia had moved increasingly towards Europe’s spending model over the last decade and the battle over to how to pay for increasing social services like the NDIS was only beginning.

“We are making important social choices without having proper discussions and we keep pretending to ourselves that the finish line is in sight,” he said.

“There is horrendous politics to come between now and finally figuring out where we end up in our national social compact.”

He said the dominant view of economists is that “you tax the bejesus out of stuff” that can’t move like land and minerals and be more cautious on things that can move, such as international capital, which the Turnbull government passed changes to this week through a $24 billion company tax cut.

“When people say the company tax would go to foreigners, it certainly would, but the more you can convince extra foreign money to come here, then the more productivity and wages lift alongside it,” he said.

“The thing that people kind of don’t get is the thing that makes the economics of it the best, make the politics of it the worst.”