Personal Income Tax Rate and How It Affects High Income Earners

Ever wondered why there are high income earners who are not rich? New federal Treasury research shows personal income tax rate system is to be blamed.

The research said the “tax concentration” on high-income earners has been distorting this group’s decisions to save, work, and invest as it puts “pressures” on the personal income tax rate system.

This rising tax burden has been affecting top earners’ save-work-invest decisions for decades up to 2016, the report said.

It’s not beneficial for these taxpayers but very efficient for the wealthy who have plenty of time and money to analyse ways to reduce their taxes.

The report concluded that the system has the potential to chip away at community trust.

Progressive Personal Income Tax Rate

Shortly after the election laden with disagreements over Morrison government’s income tax cuts proposal and Labor’s economic inequality concerns, the Treasury said that Australia’s tax system started becoming progressive between 1994-95 and 2015-2016.

Treasury researchers said, ‘‘Choices by successive Australian governments have altered marginal personal income tax rates and extended tax thresholds in ways that have reduced the income tax incidence on lower income earners, and increased the income tax incidence on higher income earners.’’

‘‘This has also seen an increase in income tax concentration, whereby a narrower proportion of high income earners pay a larger share of total Australian personal income taxes.’’

The research did not cover the recently ratified seven-year income tax cut plan by the Coalition, which supposedly will ease the tax burden of high-income earners by 2024-25.

Taxable incomes of high-income earners have increased three folds

Taxable incomes, according to the Treasury, have increased by more than two times for all income decile groups with the greatest increase experienced by the top 10 per cent whose taxable incomes have gone up by three times over the two decades.

Middle-income earners with an income range of $42,000 and $77,000, have the slowest taxable income increase in 2015-16.

Taxable income includes taxes on salary and wages, interests, dividends, royalties, rental incomes, and net capital gains.

Taxable income excludes tax-free incomes like superannuation earnings for people over the age of 60.

Progressive Personal Income Tax Rate Trade-Offs

There’s bound to be a quid pro quo between progressive tax system and efficiency, as well as simplicity and sustainability, according to the Treasury.

Authors of the report Graeme Davis, Philip Akroyd, David Pearl, and Tristram Sainsbury said, ‘‘Escalating marginal effective tax rates can distort individual decisions to work, save, and invest.’’

‘‘In general, systems that are more steeply progressive – that is, with higher marginal tax rates and a greater distance between marginal and average tax rate curves – will generate greater inefficiencies.’’

The report also said progressivity in personal income tax rate may lead to greater complexity and encourage the wealthy to engage in tax planning.

The Treasury research said that, ‘‘Though progressivity in the system is important, it is necessary that the tax system remains simple and consistent.’’

‘‘Having too many policies aimed at increasing progressivity can make the tax system complex and provide opportunities for tax planning.’’

It noted that the flatter marginal tax rates proposed in 2010 by then-Treasury secretary Ken Henry still resulted to high-income earners paying more tax, at the heart of which is the personal income tax rate system Australia has.

All is not lost, if you’re a high-income earner, we can still help you save on taxes and get the better of your personal income tax rate. Contact us here at Sphere Accountants & Advisors. Let us help you!