― 53 ―
Concessional Allowances
6.52. Another aspect of tax drift relates to the complaint that adjustments to dependant allowances under personal income tax have not kept pace with inflation and that, in consequence, the real value of these allowances has been seriously eroded.
6.53. That this is a valid complaint may be illustrated in terms of a taxpayer with wholly dependent wife and two dependent children. In 1954–55 such a taxpayer would have qualified for a $520 deduction from net income for his dependants. Had the size of the deduction been fully adjusted for inflation, it would by 1973–74 have amounted to $1,030—almost exactly twice the earlier figure, the consumer price index having practically doubled in the meantime. In actual fact, the deduction in 1973–74 was $832, only 80.8 per cent of what it would have been if fully hedged against inflation. Table 6.F shows, for selected net incomes, how in 1973–74 a taxpayer with wife and two children was penalised by the deduction being $832 rather than $1,030.
| Tax as proportion of net income, assuming | |||
| Net income | $832 deduction(a) | $1,030 deduction(b) | Additional tax saving if deduction $1,030 rather than $832 |
| $ | per cent | per cent | $ |
| 2,500 | 4.8 | 3.7 | 26 |
| 3,000 | 6.6 | 5.4 | 32 |
| 4,000 | 9.9 | 8.8 | 43 |
| 6,000 | 16.2 | 15.1 | 66 |
| 8,000 | 21.2 | 20.2 | 75 |
| 12,000 | 28.8 | 28.0 | 96 |
| 16,000 | 34.9 | 34.2 | 108 |
| 20,000 | 39.7 | 39.1 | 119 |
| 30,000 | 47.7 | 47.3 | 126 |
| 50,000 | 54.7 | 54.5 | 132 |
| note | |||
6.54. The extent to which the dependant allowance for wife and two children, after adjusting for inflation, has fallen short of the 1954–55 allowance varies considerably from year to year depending on the size and timing of increases in allowances and the rate of inflation. This is apparent from the first column in Table 6.G. Since the late 1950s, however, there has invariably been a substantial short-fall, even in 1967–68 and 1972–73 when dependant allowances were adjusted. Moreover, because inflation has been so severe recently, the short-fall in 1973–74 was almost as great as it has ever been.
6.55. It is clear from the remaining columns of Table 6.G that the several categories of dependant allowances have been affected differently. In 1973–74 the spouse allowance was 70.7 per cent of the adjusted 1954–55 figure, the first-child allowance 84.3 per cent, while the allowance for other children was fully adjusted for inflation. In 1957–58, 1967–68 and 1972–73, all three categories were raised by identical amounts ($26 on the first two occasions and $52 on the last); but since the spouse allowance was the largest to start with and the other-children allowance the smallest, the percentage increases in allowances have inevitably been greatest for other children and least for spouse.
― 54 ―
| Percentage of inflation-hedged 1954–55 allowances | ||||
| Year | Spouse + 2 children | Spouse | First child | Other children |
| per cent | per cent | per cent | per cent | |
| 1955–56 | 96.1 | 96.1 | 96.1 | 96.1 |
| 1956–57 | 90.8 | 90.8 | 90.8 | 90.8 |
| 1957–58(a) | 103.4 | 98.9 | 104.9 | 112.4 |
| 1958–59 | 101.8 | 97.4 | 103.3 | 110.6 |
| 1959–60 | 99.3 | 95.0 | 100.7 | 108.0 |
| 1960–61 | 95.4 | 91.3 | 96.8 | 103.7 |
| 1961–62 | 95.0 | 90.9 | 96.3 | 103.3 |
| 1962–63 | 94.8 | 90.7 | 96.1 | 103.0 |
| 1963–64 | 93.9 | 89.9 | 95.3 | 102.1 |
| 1964–65 | 90.5 | 86.6 | 91.8 | 98.4 |
| 1965–66 | 87.4 | 83.6 | 88.7 | 95.0 |
| 1966–67 | 85.1 | 81.4 | 86.3 | 92.5 |
| 1967–68(a) | 93.1 | 86.0 | 95.5 | 107.4 |
| 1968–69 | 90.8 | 83.8 | 93.1 | 104.7 |
| 1969–70 | 87.9 | 81.2 | 90.2 | 101.4 |
| 1970–71 | 83.9 | 77.5 | 86.1 | 96.8 |
| 1971–72 | 78.6 | 72.5 | 80.6 | 90.7 |
| 1972–73(a) | 91.2 | 79.8 | 95.0 | 114.0 |
| 1973–74 | 80.8 | 70.7 | 84.3 | 101.0 |
| note | ||||
6.56. However, the erosion of the real value of the amount deductible from net income must not be confused with the erosion of the real value of tax saving resulting from deductions. As individuals are pushed into higher marginal tax brackets because of inflation, a dependent deduction of given size means larger tax saving in money terms—perhaps larger in real terms too. At the same time, the more fully are tax schedules adjusted for inflation, the lower still will be the real value of tax savings associated with dependant deductions of given size. It is thus important, if tax schedules are going to be regularly altered, to adjust dependant allowances regularly too—more important, indeed, than if tax rates are not so altered.
6.57. The link between the level of tax rates and the tax saving involved in concessions for dependants would vanish were such concessions to be given as tax rebates rather than as deductions from taxable income. It is thus significant that a special rebate of tax was in fact introduced in the 1974–75 Budget aimed at increasing the value of dependant allowances for persons at the lower end of the income scale. In future a taxpayer whose income is sufficiently low that the tax saving through claiming dependant deductions would be less than 40 per cent of the amount deductible will attract a rebate of tax to bring the tax saving up to 40 per cent. This means that a taxpayer on a marginal rate of, say, 32 per cent who, in the normal course of events, would save $266 in tax as a result of the present $832 concessional deduction for wife and two children, will now also receive a rebate of $66 to lift the tax saving to $332 (40 per cent of $832).
6.58. The rebate will compensate those families most in need for at least some of the recent inflation-induced
decline in the value of dependant allowances. It will also tend to cushion the value of dependant allowances, for
such families, from the effect of tax cuts—including the cuts introduced in 1974–75 when the rebate comes into
effect. But it means that as money incomes continue to expand with inflation, the element of tax saving from
moving into a higher tax bracket and thus being able to
― 55 ―
claim deductions against higher marginal tax
will disappear for persons on low incomes.
6.59. The eroding effect of inflation has been less conspicuous with other concessional deductions since the amount deductible is not restricted in the same way as dependant allowances. Some of these other deductions are open-ended; and in the case of one of the main ones that is not—life insurance and superannuation contributions—the maximum limit has gone up faster than inflation: in 1973–74 the real value of the maximum deduction of $1,200 was 50 per cent greater than in 1954–55, though it is true that the real value of this maximum deduction has fallen by nearly 30 per cent since being raised to $1,200 in 1967–68. What was said in paragraph 6.56 applies to these other deductions too: because the concessions are in the form of deductions from taxable income, the real value of the tax saving has in some measure been protected by taxpayers being pushed into higher tax brackets where the deductions are worth more, and would have been protected even further had tax rates not been cut in 1970–71, 1972–73 and 1974–75.