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A co-director of the latest HILDA survey says the government must go further than stage 3 cuts to lower the average tax rates of low and middle-income earners.
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Bracket creep hands top earners biggest tax breaks, survey finds
14 February 2024
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10 minute read
The average tax rate has fallen over the past two decades, but bracket creep undermines the progressive system by handing the biggest breaks to the country’s highest earners, the latest HILDA survey shows.
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An individual’s average tax rate is the share of income they pay in taxes while their marginal tax rate is the rate imposed on their last dollar of income.
The survey found the top 10 per cent of earners had a 2.4 per cent lower tax rate in 2021 compared to 2003 while the average rate for the general population changed only by 0.5 per cent in the same period.
University of Melbourne professor Roger Wilkins, the co-director of the survey of Household, Income and Labour Dynamics in Australia (HILDA) survey, said this meant the highest earners received “significantly greater tax relief”.
“On average, income tax has gone down during the past 21 years, so there is a dissonance around people thinking they pay too much tax and what has actually happened,” he said.
“The average tax rate has fallen most for people in the top 10 per cent of incomes."
The HILDA survey tracked more than 17,000 people in 9,000 households between 2001 and 2021 to gauge their economic wellbeing, family and social life, physical and mental health and labour market participation. The latest results, released on Monday, were based on responses from 2021.
It found average tax rates were highest for people in the prime working-age years of 25 to 54, and lowest for people aged 65 and over, reflecting differences in income levels across age groups. Tax concessions available to retirees also contribute to the low average tax rates of those aged over 65, it said.
The average tax rate for people aged 55 to 64 “rose substantially” since 2010 due to an increase in employment participation. People aged 15 to 24 saw their tax rates decline from 9.3 per cent in 2006 to 4.3 per cent in 2014 before remaining broadly consistent in the following decade.
While top earners received the most relief in the last 20 years, Mr Wilkins said average workers had been hurt by bracket creep, with high inflation since 2021 “exacerbating” its effects.
“I’d expect average tax rates to rise more sharply,” he said. “The stage 3 income tax cuts don’t fully address this. Lowering the average income tax rates of middle to low-income earners should be a priority for income tax reform.”
“Currently, benefits are mostly going to high-income earners, so introducing measures to reduce the tax burden further down the income distribution chain would make an important difference to the lives of many more Australians.”
The tax system was also doing less to reduce income inequality than it was 20 years ago, he said.
The HILDA survey found income taxes and government benefits reduced the Gini coefficient, a measure of inequality from a scale of 0 to 1, by 0.153 in 2021 but by 0.139 in 2021. Their effect on the Gini coefficient was higher in 2020 due to additional income support introduced during the pandemic.
“Government income taxes and benefits substantially impact the incomes households have available for consumption and saving. Income taxes and benefits reduce income inequality, although the extent to which they do this has diminished somewhat since the beginning of this century,” the survey said.
It also found incomes were highest in capital cities and people living in Sydney, Melbourne, Brisbane and Perth paid more income tax.
“Adelaide is a standout as its income levels are similar to other regions outside the capitals. It’s unclear whether that is because wages are lower or employment participation is lower there. Other mainland capitals have had high population growth and Adelaide hasn’t, which may indicate some economic stagnation in Adelaide,” Mr Wilkins said.
The gender pay gap also narrowed in the last two decades and women experienced greater earnings growth than men. In 2021, women earned $0.86 for every dollar taken home by men, up almost $0.10 since 2016.
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