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

I. Complexity of Rate Scale

14.3 In its preliminary report the Committee, addressing itself to the situation as it was in 1973–74, drew attention to the fact that Australia's rate scale, with its twenty-nine marginal steps, was by international standards, exceptionally complicated. As Table 14.A indicates, the United Kingdom employs only ten marginal steps, Canada thirteen, and New Zealand nineteen; the United States employs seventeen, but has eight more for very large investment incomes, mostly well beyond the point at which the Australian scale stops. Two particular aspects of these overseas scales, closely related to their lesser number of steps, were noted in the preliminary report:

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TABLE 14.A: MARGINAL TAX RATES: SELECTED COUNTRIES, 1974 (a) (Percentage of taxable income)

                                           

Australia (b)	Per cent	United Kingdom (c)	Per cent	United States of America (d)	Per cent	Canada	Per cent	New Zealand	Per cent
$A		£		$US		$Can		$NZ
0–1,000	1	0–4,500	33	0–500	14	0–500	12	0–500	18.0
1,000–2,000	7	4,500–5,000	38	500–1,000	15	500–1,000	18	500–1,000	18.5
2,000–3,000	14	5,000–6,000	43	1,000–1,500	16	1,000–2,000	19	1,000–2,000	19.0
3,000–4,000	20	6,000–7,000	48	1,500–2,000	17	2,000–3,000	20	2,000–2,500	22.5
4,000–5,000	26	7,000–8,000	53	2,000–4,000	19	3,000–5,000	21	2,500–3,000	26.5
5,000–6,000	32	8,000–10,000	58	4,000–6,000	21	5,000–7,000	23	3,000–3,500	28.5
6,000–7,000	38	10,000–12,000	63	6,000–8,000	24	7,000–9,000	25	3,500–4,000	32.0
7,000–8,000	44	12,000–15,000	68	8,000–10,000	25	9,000–11,000	27	4,000–4,500	34.5
8,000–10,000	48	15,000–20,000	73	10,000–12,000	27	11,000–14,000	31	4,500–5,000	36.0
10,000–12,000	52	20,000+	83	12,000–14,000	29	14,000–24,000	35	5,000–5,500	39.0
12,000–16,000	55			14,000–16,000	31	24,000–39,000	39	5,500–6,000	41.5
16,000–20,000	60			16,000–18,000	34	39,000–60,000	43	6,000–6,500	44.5
20,000–40,000	64			18,000–20,000	36	60,000+	47	6,500–7,000	46.0
40,000+	67			20,000–22,000	38			7,000–8,000	47.0
				22,000–26,000	40			8,000–9,000	48.0
				26,000–32,000	45			9,000–10,000	48.5
				32,000+	50			10,000–11,000	49.0
								11,000–12,000	49.5
								12,000+	50.0
note

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• (a) Rates of tax on the early steps are substantially higher than in the Australian scale. The outstanding example is the United Kingdom where the height of the initial step was until recently 30 per cent and has now been lifted to 33 per cent. Australia's initial step was only 0.2 per cent in 1973–74 and earlier years; it has now been raised to 1 per cent.
• (b) There are noticeably fewer, and hence correspondingly much wider, steps over the bottom ranges of income than under the Australian system. Again the United Kingdom stands out, with an initial step extending over the first £4,500 of taxable income. In contrast, twenty of the twenty-nine steps featuring in the Australian rate scale until 1974–75 occurred below a taxable income of $6,000, encompassing the bulk of taxpayers; the number of steps below $6,000 has now been sharply cut back to six.

14.4. The sole defence known to the Committee for the large number of steps that has been traditional in the Australian scale is that it provides a nearly continuously graduated set of rates, and is thus capable of moving nearly continuously with the size of income and hence also with ability to pay, if this in turn be supposed to be continuously related to income. But as has been emphasised in earlier chapters, ‘ability to pay’ in the vertical equity sense is not a quantifiable concept bearing an exact relationship with income. With wider steps average rates would still rise with income, and this is the prime requirement for vertical equity. To require that the average should rise smoothly is to try to be precise about something that is essentially imprecise.

14.5. It could not seriously be argued that as many as twenty-nine marginal steps were ever necessary for practical fairness. So many steps only confuse taxpayers. They lead to inchoate fears of ‘moving into a higher tax bracket’ whenever income increases. They add to the complexity of tax calculations, whether for the taxpayer or the administration. Experience suggests that they make changes in rates difficult to introduce. Indeed if, as the Committee proposes, the share of income tax revenue be gradually reduced as a broad-based consumption tax is built up, simplification of the scale by a further reduction in the number of the steps on the fourteen applying in 1974–75 would be desirable.