Intermediate range

14.34. A significant feature of the intermediate range, which encompasses the majority of taxpayers and provides the bulk of revenue, is the high marginal rates of tax applying over the greater part of the range. Thus by the time taxable income reaches $8,000, the marginal rate is already 48 per cent, and by the time it reaches $12,000 the rate is as high as 55 per cent.

14.35. It follows that any attempt to raise substantial additional revenue from this range, if unaccompanied by increases in marginal rates in the low range, would necessarily involve lifting marginal rates over a wide section of the intermediate range to excessively high levels. For example, 10 per cent more income tax revenue, secured exclusively from net incomes in excess of $10,000, would, on the basis of 1971–72 figures, have meant an increase in average tax rates of the order of 50 per cent and a rather steeper increase in marginal tax rates. Instead of paying at a marginal rate of 48 per cent, an individual on a taxable income of $10,000 would have been subjected to tax at a rate of over 80 per cent on each extra dollar he earned.

14.36. Recent restructuring of the rate scale to relieve the tax burden on the low range, and on the bottom end of the intermediate range, has brought the issue into sharp focus. As Table 14.C reveals, taxable incomes between about $5,500 and $11,000 now face significantly higher marginal tax rates than in 1973–74: indeed, on a taxable income of $7,000 the increase is more than 16 per cent.

TABLE 14.C: AVERAGE AND MARGINAL TAX RATES, 1973–74 AND 1974–75: Selected Incomes

1973–74   1974–75  
Taxable income   Average tax rate   Marginal tax rate   Average tax rate   Marginal tax rate   Change in marginal tax rate between 1973–74 and 1974–75  
per cent  per cent  per cent  per cent  points  per cent 
1,500  6.4  12.7  3.0  7.0  -5.7  -44.9 
2,000  8.4  17.2  4.0  14.0  -3.2  -18.6 
3,000  12.0  22.0  7.3  20.0  -2.0  -9.1 
4,000  15.2  30.3  10.5  26.0  -4.3  -14.2 
5,000  18.3  33.3  13.6  32.0  -1.3  -3.9 
6,000  21.0  35.7  16.7  38.0  +2.3  +6.4 
7,000  23.3  37.9  19.7  44.0  +6.1  +16.1 
8,000  25.3  41.8  22.8  48.0  +6.2  +14.8 
10,000  28.9  48.2  27.8  52.0  +3.8  +10.8 
12,000  32.1  54.6  31.8  55.0  +0.4  +0.7 
16,000  37.7  60.3  37.6  60.0  -0.3  -0.5 
20,000  42.2  64.0  42.1  64.0  0.0  0.0 
40,000  53.1  66.7  53.1  67.0  +0.3  +0.5 

  ― 193 ―

14.37. The upward adjustment of marginal tax rates in this latest restructuring has a number of disturbing implications. It may well inhibit work effort in view of the fact that, for many taxpayers, higher marginal rates have been accompanied by lower average rates: for such taxpayers both the income and substitution effects referred to in paragraph 14.28 will exert a depressing effect on work effort. Moreover, to the extent that marginal tax rates are built into claims for higher incomes in the manner discussed in Chapter 6, increases in marginal rates over much of the intermediate range will tend to foster more rapid inflation. Finally, raising marginal rates to higher levels may encourage avoidance and evasion among a larger circle of taxpayers.

14.38. It was in some degree because of its concern to keep marginal rates in the intermediate range as low as possible that the Committee in earlier paragraphs proposed a higher and wider initial marginal rate bracket and some modification of marginal rates in the high range. These measures will permit wider tax brackets and less steeply rising marginal rates over the intermediate range. Any long-run shift towards less reliance on income tax will facilitate further moves in this direction.

14.39. As indicated in Chapter 6, it is taxpayers in the intermediate range, especially in the top half of the range, who have suffered most from the unplanned restructuring of tax liability produced by inflation. In the next section the question of adjusting the rate schedule for the effects of inflation is examined more closely.