The University of Sydney-    Classic Texts in Australian and International Taxation Law

Income Tax Rates

6.42 Even were the present trend towards greater reliance on personal income tax thought to be in the right direction, it is unlikely that inflation is achieving the restructuring at the right pace and in the right way. It especially has to be borne in mind that the drift associated with personal income tax does not operate uniformly over the whole income range. The Committee has received numerous submissions on this point and it deserves close examination.

6.43. The 1973–74 rate schedule, now superseded, was a modified version of the one introduced in 1954–55 which, apart from a special levy or rebate in certain years as part of counter-cyclical policy, remained unaltered until 1970–71. In that year, as Table 6.B reveals, reductions of approximately 10 per cent in tax payable on taxable incomes up to $10,000 were made, while reductions in tax payable above that level progressively declined to 4.4 per cent at $20,000 and zero at $32,000. The rate scale was again adjusted in 1972–73 to provide an overall reduction of about 10 per cent in total tax collections but the adjustment was so arranged that the percentage reduction in tax payable decreased as income rose.

TABLE 6.B: PERSONAL RATE SCHEDULE: MARGINAL TAX RATES(a)

                                                                 

Taxable Income	1954–55	1970–71(b)	1973–74	Taxable Income	1974–75(c)
$	per cent	per cent	per cent	$	per cent
0–200	0.4	0.3	0.2
201–300	1.3	1.2	0.8
301–400	2.9	2.7	2.4
401–500	4.6	4.1	3.8	0–1,000	1.0
501–600	6.3	5.5	4.9
601–800	8.3	7.4	6.5
801–1,000	10.8	9.7	8.2
1,001–1,200	12.5	11.3	9.8
1,201–1,400	14.2	12.8	11.3
1,401–1,600	15.8	14.3	12.7	1,001–2,000	7.0
1,601–1,800	17.5	15.8	14.1
1,801–2,000	19.2	17.3	15.4
2,001–2,400	21.7	19.5	17.2
2,401–2,800	24.6	22.1	19.6	2,001–3,000	14.0
2,801–3,200	27.1	24.4	22.0
3,201–3,600	29.6	26.7	24.4	3,001–4,000	20.0
3,601–4,000	32.1	28.8	26.8
4,001–4,800	35.4	31.9	30.3	4,001–5,000	26.0
4,801–5,600	38.3	34.5	33.3
5,601–6,400	41.3	37.0	35.7	5,001–6,000	32.0
6,401–7,200	43.8	39.4	37.9	6,001–7,000	38.0
7,201–8,000	46.3	41.7	39.9	7,001–8,000	44.0
8,001–8,800	48.8	43.9	41.8	8,001–10,000	48.0
8,801–10,000	51.7	46.5	44.1
10,001–12,000	55.0	50.6	48.2	10,001–12,000	52.0
12,001–16,000	57.9	56.4	54.6	12,001–16,000	55.0
16,001–20,000	60.4	62.4	60.3	16,001–20,000	60.0
20,001–32,000	63.3	66.7	64.0
32,001–40,000	66.7	66.7	64.0	20,001–40,000	64.0
40,001 and over	66.7	66.7	66.7	40,001 and over	67.0
note

  ― 50 ―

6.44. These changes were partly designed to meet the criticism that in periods of inflation when money incomes are rising rapidly the continued use of the same progressive scale, defined as such scales conventionally are on the basis of money income, produces substantial increases in the ‘burden’ of tax as reflected in average rates of tax.

6.45. The simplest way of depicting this increasing ‘burden’—a burden which, it ought to be stressed, derives ultimately not from inflation but from government spending increasing at a faster rate than gross national product—is to compare the average tax payable in different years on the same ‘real’ income, i.e. on an income which remains unchanged when the inflation component is removed. A set of such real incomes is assembled in Table 6.C. As a comparison of column 6 with column 2 indicates, average rates of tax in 1973–74 were somewhat higher than in 1954–55 at all levels of real income, notwithstanding the cuts made in 1970–71 and 1972–73. In terms of the percentage increase in average rates of tax (columns 4 and 7), the taxpayers whose position has changed most by comparison with their predecessors in 1954–55 are those at the bottom of the scale.

TABLE 6.C: EFFECTS OF INFLATION ON ‘REAL’ INCOME RATE SCHEDULE

                                 

	1954–55	1969–70(a)			1973–74			1974–75(b)
Taxable income (constant real size 1973–74 prices)	Average tax rate	Average tax rate	Increase in average tax rate since 1954–55	Reduction in after-tax income as a result of increase in average tax rate since 1954–55	Average tax rate	Increase in average tax rate since 1954–55	Reduction in after-tax income as a result of increase in average tax rate since 1954–55	Average tax rate	Increase in average tax rate since 1954–55	Reduction in after-tax income as a result of increase in average tax rate since 1954–55
1	2	3	4	5	6	7	8	9	10	11
$	Per cent	Per cent	Per cent	Per cent	Per cent	Per cent	Per cent	Per cent	Per cent	Per cent
1,500	3.7	6.1	64.9	2.4	6.4	73.0	2.8	3.7	..(c)	(0.1)(d)
2,000	5.4	8.1	50.0	2.8	8.4	55.6	3.2	5.7	5.6	0.2
3,000	8.3	11.8	42.2	3.8	12.0	44.6	4.1	9.4	13.3	1.3
4,000	10.7	15.0	40.2	4.8	15.2	42.1	5.0	13.1	22.4	2.6
6,000	15.2	20.6	35.5	6.4	21.0	38.2	6.9	20.4	34.2	6.2
8,000	19.0	25.0	31.6	7.5	25.3	33.2	7.8	27.0	42.1	9.9
12,000	25.3	32.0	26.5	9.0	32.1	26.9	9.2	35.7	41.1	13.9
16,000	30.1	37.4	24.3	10.5	37.7	25.2	10.9	41.4	37.5	16.1
20,000	34.2	41.5	21.3	11.1	42.2	23.4	12.2	45.8	33.9	17.5
30,000	41.8	48.0	14.8	10.7	49.5	18.4	13.3	51.8	23.9	17.3
50,000	49.7	54.6	9.9	9.7	55.8	12.3	12.2	57.7	16.1	15.9
100,000	57.8	60.7	5.0	6.8	61.3	6.1	8.3	62.4	8.0	10.9
note note

6.46. A more satisfactory indicator of the change in tax liability resulting from inflation is the percentage reduction in disposable income (i.e. income after tax) resulting from the change in average rates of tax. This variable is shown in columns 5 and 8 of Table 6.C and, except at high levels, presents the contrary impression to columns 4 and 7. Up to a certain income level the effect of inflation is to reduce disposable income by a greater percentage as taxable income rises because under a progressive tax system disposable income increases at a smaller percentage rate than does taxable


  ― 51 ―
income. As a result, even though average rates of tax may increase to a greater extent in the lower income ranges, the net effect of inflation as one moves up the income scale is intitially to reduce disposable income after tax by increasing percentage amounts. This reflects the fact that at low incomes, where income tax is a small proportion of income, even a large percentage increase in tax takes only a small part of income. Eventually this trend is reversed. At very high levels the percentage reduction in disposable income, for a given rate change, is considerable.

6.47. It follows that criticisms based on percentage increases in the average rates of taxation claiming that the change in tax liability as a result of inflation is inversely related to taxable income are too simplistic. The changes in the distribution of tax liability as a result of inflation are much more complex than this: all taxpayers face increases in average rates of tax and the disposable incomes of taxpayers with higher taxable incomes are in many cases reduced proportionately more than the disposable incomes of those with lower taxable incomes. Much of the confusion about the distributional effects of changes in the effective rates of income tax as a result of inflation can be attributed to the application of an inappropriate summary measure to what is essentially a complex problem. If anything the pattern of changes in after-tax income as inflation proceeds lends support to a view that people well up the income scale, but not at the top, are relatively hardest hit.

6.48. The 1974–75 rate schedule, summarised in Table 6.B and described more fully at the beginning of Chapter 14, will moderate the effects referred to above only to a limited extent. Average rates of tax have been cut on taxable incomes up to $50,000, the reduction being fairly substantial on taxable incomes below $8,000 but no more than a gesture on taxable incomes above $12,000. Nevertheless, rapid inflation will soon offset these tax advantages, particularly for persons with taxable incomes between $5,500 and $11,000 who now face the prospect of paying noticeably higher marginal rates on any additional income they earn. It is impossible to tell how much tax real incomes of various sizes will attract in 1974–75: it depends on how quickly prices rise in 1974–75. However, Table 6.C has been extended to include figures for 1974–75 showing the tax implications for various levels of real income on the assumption that prices in 1974–75 are 20 per cent higher than in 1973–74. A comparison of the last three columns of the table with those for 1973–74 suggests that, as far as the tax schedule alone is concerned, all real incomes above about $7,000 (in 1973–74 prices) will face heavier income tax in 1974–75 than in 1973–74. Moreover, should a capital gains tax apply in 1974–75, requiring the inclusion in income of half of any realised capital gains, the taxable incomes of some individuals are going to rise rather faster than otherwise and thus accentuate the tax drift.

6.49. If inflation continues at anything like its present rate, it will be a matter of only two or three years before even the average wage earner finds himself paying taxes at marginal rates of 50 per cent or more. In 1954–55, as Table 6.D reveals, the average male wage earner claiming no deductions was subject to marginal tax at 17.5 per cent. In 1973–74 the marginal tax of his counterpart had risen to 35.7 per cent; and in 1974–75, if average earnings increase in the current year by the extremely conservative estimate of 20 per cent, the figure will be as high as 44.0 per cent. Admittedly, as the final column in the table makes clear, the increase in average earnings over the years is only partly due to inflation: growth in real incomes has also occurred. But as the final column indicates too, increases in average earnings in very recent years predominantly reflect inflation: thus, as much as 79 per cent of the $858 addition to average earnings in 1973–74 was matched by higher prices, the largest percentage for many years.

  ― 52 ―

TABLE 6.D: TAX ON AVERAGE EARNINGS PER EMPLOYED MALE UNIT, 1954–55 TO 1973–74(a)

                                             

Year	Average earnings	Total tax	Average tax rate	Marginal tax rate	Inflation component of increase in average earnings(b)
	$ per annum	$	per cent	per cent	per cent
1954–55	1,799	173	9.7	17.5
1955–56	1,924	197	10.3	19.2	59
1956–57	2,012	215	10.7	21.7	(h)
1957–58	2,070	227	11.0	21.7	34
1958–59	2,132	241	11.3	21.7	53
1959–60(c)	2,304	264	11.5	20.6	31
1960–61	2,413	302	12.5	24.6	87
1961–62(c)	2,475	301	12.2	23.4	19
1962–63(c)	2,543	317	12.5	23.4	7
1963–64(c)	2,678	349	13.0	23.4	17
1964–65	2,876	418	14.5	27.1	51
1965–66(d)	3,011	466	15.5	27.8	77
1966–67(d)	3,219	554	17.2	30.3	39
1967–68(d)	3,406	580	17.0	30.3	57
1968–69(d)	3,661	659	18.0	32.9	35
1969–70(d)	3,968	760	19.2	32.9	38
1970–71(e)	4,410	828	18.8	32.7	43
1971–72(f)	4,836	986	20.4	36.0	70
1972–73(g)	5,278	1,009	19.1	33.3	66
1973–74	6,136	1,308	21.3	35.7	79
note

6.50. Evidence of a different kind pointing to the same conclusion is presented in Table 6.E. In less than a decade the percentage of taxpayers with net incomes above $6,000 has risen from 4 per cent to nearly 16 per cent. Even within the space of a single year, according to the 1970–71 and 1971–72 figures, the change is striking—and will certainly prove yet more striking in 1972–73 and 1973–74 when statistics for those years become available.

TABLE 6.E: PERCENTAGE OF INDIVIDUAL TAXPAYERS WITH NET INCOME IN EXCESS OF $3,000, $6,000 AND $10,000

             

	1963–64		1970–71		1971–72
Net income (a) in excess of	Males	Total	Males	Total	Males	Total
$ per annum	per cent	per cent	per cent	per cent	per cent	per cent
3,000	32.0	24.8	71.6	54.1	76.6	60.2
6,000	4.9	4.0	16.1	11.5	22.0	15.7
10,000	1.4	1.1	3.1	2.3	4.3	3.1
note

6.51. If the rate schedule is to be protected from the distorting and eroding effects of inflation, whether on grounds of fairness or to induce people to moderate their demand for higher incomes, it will need to be adjusted more comprehensively than was done in 1974–75. To ensure that the percentage of taxable income going in tax is properly cushioned against inflation at all income levels, the width of marginal tax brackets must be increased regularly in line with changes in the general price level. Frequent adjustment of the rate schedule and the manner in which it might be done are considered at greater length in Chapter 14.