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SUPPLEMENTARY EXPLANATORY MEMORANDUM TO AMENDMENTS
MOVED BY SENATOR MURRAY ON SHEET 5263
TAX LAWS AMENDMENT (PERSONAL INCOME TAX REDUCTION)
BILL 2007
Circulated by authority of Senator Murray
OUTLINE
The Australian Democrat amendments, listed on Sheet 5263, have two key objectives:
(1) To index the tax-free threshold of $6000 to CPI from 1 July 2007; and
(2) To oppose lifting the top tax threshold from $150,000 to $180,000.
SCHEDULE 1
Income Tax Rates Act 1986 (the Rates Act)
Item 1 tax-free threshold indexation
Democrat Amendment (1) proposes a method for indexing the current tax-free threshold of
$6000 to inflation, as measured by the CPI.
Background
There is widespread support in the professions, business and the community for the indexation
of tax rates to maintain the present value of tax thresholds and to minimise the effects of
bracket creep. Bracket creep is the impact of inflation related salary increases on the static
progressive marginal tax rates.
The Australian Democrats have long supported the indexing of all income tax thresholds, but
in the absence of sufficient funding to support that reform, the priority is where the impact is
greatest for low-income earners. This means indexing the tax-free threshold of $6 000.
Australia's income tax-free threshold of $6 000 is unchanged since 2000. If it had been
indexed since 2000 it would now be well over $7 500. Had the 1980 personal threshold of
$4041 kept pace with earnings, the tax-free threshold would now be over $15000. With the
caveat that it is difficult to readily compare systems, the data indicates that in general,
Australia's current $6 000 tax free threshold is less than half the OECD average.
People cannot live on $6 000 a year. Australia's welfare floor is around $13 000, the minimum
income required for basic subsistence. There is no justification for income taxing someone
earning less than this value. By continuing to tax individuals at an absolute, rather than
indexed value, this social inequality is magnified every year.
A tax-free threshold has at least four advantages practical, psychological, immediacy and
administrative. The practical point is that excluding low income earners from the income tax
system makes sense for that sector, from a personal equity and efficiency point of view.
The psychology of knowing what proportion of your income is entirely yours to keep has high
utility. It is an intrinsic good. That utility is not satisfied or is ineffective when a tax-free
threshold is too low. This view is well expressed in the paper by P Saunders and B Maley:
`Tax Reform to Make Work Pay'. CIS Perspectives on Tax Reform (3); Policy Monograph 62:
Since the value of the personal tax-free threshold has slipped to less than half what a
single unemployed person gets in income support and rent assistance, the
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government now takes money away from us long before we have secured our own
basic subsistence... It makes no sense to tax low income earners into poverty, and
then to pull them out of it by giving them welfare benefits and/or tax credits. It makes
a lot more sense to allow people to keep more of what they earn so that they are not
enmeshed in the welfare transfer system.
Immediacy has great attractions. Money earned and received within a week or two of work
done is better regarded than any time lag in receiving compensating rebates, credits, or welfare
adjustments. This reduces the high inefficiencies associated with so-called `churning',
whereby low incomes are taxed and then rebated back to the same individuals.
Administration has two components the private and the public. A high percentage of low
income earners have poor administrative skills, and the self-assessed income tax return is often
a chore that has its own cost in anxiety and lost opportunities, and quite frequently requires the
aid of a tax agent. At the public level is the cost of being part of the tax system, calculated as
tax system complexity and compliance costs. Tax rebates and offsets do also complicate the
tax system and are administratively costly.
In summary:
· The tax-free threshold has not been adjusted since 2000. In that time its value, due to
the effects of inflation, has depreciated by approximately 22%;
· All wage earners benefit from indexing the tax-free threshold at an equal rate;
· Preserving the value of the tax-free threshold has a far greater proportional benefit to a
low income earner than to a high income earner;
· Indexing the tax-free threshold to inflation maintains its present value in real terms;
· A higher tax-free threshold has the additional benefit of removing numbers of low
income earners from the taxation system;
· Australia's current $6 000 tax free threshold is less than half the OECD average.
Item 2 oppose top tax threshold increase
Democrat Amendment (2) and (3) omit items 13 and 15 of Schedule 1, part 2 to oppose raising
the top tax threshold from $150 000 to $180 000 from 1 July 2008.
Background
The Australian Democrats support a staged and prioritised reform of the Australian income
taxation system. Subject to affordability and sustainability, such reform does not preclude
reducing the top tax rate and/or increasing the top tax threshold, but any attention to reform for
high-income earners should be subsequent to reform for low-income earners. Their needs are
more urgent. In the present budgetary context some income tax reform for low-income earners
can only be funded if raising the top tax threshold from $150 000 to $180 000 is opposed.
FINANCIAL IMPLICATIONS
Opposing items 13 and 15 will result in a savings of revenue foregone over the forward
estimates period. This revenue saving measure could partially offset the cost of indexing the
tax free threshold as indicated in the table below:
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Costs to revenue
Total over
2007-08 2008-09 2009-10 2010-11 4 years
$m $m $m $m $m
Indexation of tax-free threshold 230 460 690 950 2 320
Retaining top threshold of $150 000 0 - 220 - 330 - 450 -1 000
Net cost 230 240 360 490 1 320
Note: Sum of financial years may differ from Total due to rounding.
In real terms, there is no cost to Government revenue by indexing the tax free threshold since
its value only increases relative to inflation. In nominal terms, the cost to Government revenue
of indexing the tax-free threshold is equivalent to the annual benefit accrued by Government
from `bracket creep' attributable to all income earners progressing from the tax-free threshold
to the 17% income tax rate (15% from 1 July 2007). The `net cost' to revenue of $1 320m can
easily be funded from the large current and projected future Budget surpluses.
Tax savings by income range
The following table shows the net tax savings of the Democrat Amendments for various
taxable incomes in each financial year from 200708 to 201011. Since the low income tax
offset will be $750 from 200708, no income tax is payable until taxable income is more than
$5 0001 above the tax-free threshold amount, e.g. taxable income over $11 000 with the current
tax-free threshold of $6 000.
1
$750 / 15% (lowest marginal tax rate) = $5 000.
3
Tax saving by selected incomes
Taxable
income 2007-08 2008-09 2009-10 2010-11
$ $ $ $
11,001 0.15 0.15 0.15 0.15
11,100 15.00 15.00 15.00 15.00
11,200 24.75 30.00 30.00 30.00
11,300 24.75 45.00 45.00 45.00
11,400 24.75 47.85 60.00 60.00
11,500 24.75 47.85 71.55 75.00
11,600 24.75 47.85 71.55 90.00
11,700 24.75 47.85 71.55 95.85
11,800 24.75 47.85 71.55 95.85
11,900 24.75 47.85 71.55 95.85
12,000 24.75 47.85 71.55 95.85
15,000 24.75 47.85 71.55 95.85
20,000 24.75 47.85 71.55 95.85
50,000 24.75 47.85 71.55 95.85
100,000 24.75 47.85 71.55 95.85
150,000 24.75 47.85 71.55 95.85
160,000 24.75 - 452.15 - 428.45 - 404.15
170,000 24.75 - 952.15 - 928.45 - 904.15
180,000 24.75 -1 452.15 -1 428.45 -1 404.15
200,000 24.75 -1 452.15 -1 428.45 -1 404.15
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