Yogi Vidyattama and Jinjing Li
“The taxation and transfer systems are the two main instruments used by governments to achieve distributional outcome,” (Whiteford 2010). Therefore, one of the questions asked when there is a change to the system, either tax cuts or in benefit composition, is its impact on income distribution. One of the policy decisions the government made in this Budget is increasing the 32.5 per cent personal income threshold from $80,000 to $87,000 from 1 July 2016. Budget Paper No. 1 of the 2016 Federal Budget stated this decision has been made to alleviate the tax burden on average full-time income earners and protect wage earners who would move into the second top tax bracket. This Government calculation claims this move could benefit 3.1 million taxpayers, especially the approximately 500 thousand workers who would move into the second top tax bracket.
This article checks this claim and examines the distributional impact of the tax bracket change in terms of area affected by the change. One important note is this change will not just benefit the middle income earners. As the tax is calculated based on the progression of income from one bracket to another, everyone with an income above $80,000 will have some income included in this bracket and the benefit of the tax bracket expansion spreads way beyond middle income earners. Our estimations from STINMOD+ is generally in line with the Government estimations, with an expected 3.1 million individuals benefitting from the tax bracket change.
The average benefit for those who will receive it is around $287.60 annually or $5.53 a week. The amount of tax saved (relative to the total income tax payable in 2015-16) peaks for people with a taxable income of $87,000 a year, with a reduction of just over 1.5% of their total income tax (excluding Medicare). The benefit is nearly 0.58% even for those with a taxable income of $180,000. Figure 1 plots the percentage of the income tax save. According to the Australian Tax Office Statistics 2013-14, the taxpayers with salaries of about $180,000 claims an average deduction of about $7,200, which means their total income is close $190K.
Figure 1 Tax saved as a proportion of the total income tax
Source: NATSEM’s calculation, three red lines are 80K, 87K and 180K
Like in many other countries, Australia also has known advantaged and disadvantaged areas. We further examined how the changes in the income tax bracket spread spatially in Australia. We calculated the average impact for all tax payers (including those whose income is less than $80,000 a year) and the average tax saved proportionally to the average taxable income in the region.
The spatial pattern of the impact is presented on the Australian map in Figure 1. based on Statistical Area Level 4 (SA4) with the insets of capital cities. The SA4 regions are the largest sub-State regions designed for the output of labour force data and reflect labour markets within each State and Territory (ABS 2010 1270.0.55.001 - Australian Statistical Geography Standard (ASGS): Volume 1 - Main Structure and Greater Capital City Statistical Areas, July 2011 Released 23/12/2010. The ABS claims SA4s provide the best sub-state socio-economic breakdown.
The darker colour indicates higher benefits received by the taxpayers in the area. In these insets, the map suggests that the more advantaged an area is, the higher the benefit they receive. In Sydney, Northern area, Northern beaches and Eastern suburbs receive benefits higher than $80 annually, along with inner Perth, Darwin, inner Brisbane and Canberra. Inner Melbourne is not in this class but still receives more than $70 annually, while Adelaide Central and Hills are above $60 annually. Outside the capital cities, Fitzroy and Mackay are identified with the highest benefit. Although not always directly in the area, these two areas benefit from the activities of the resource sector such as the labour force supply that may fly in and out of the mining area. Resource sectors seem to receive the benefit in this calculation with Outback Queensland and Western Australia also considered to be top recipients. It is important to note though that the Hunter Valley and South Australian Outback still receive a considerable benefit with the average of more than $60 annually.
Source: ATO 2013-14 data, NATSEM’s calculation
Although the more advantaged area seems to benefit more, it can also be argued that the higher the income, the more tax they pay and therefore, the more impact in dollar number.
The next figure shows the spatial impact based on the proportion of this benefit to their taxable income. Like the previous figure, the darker colour indicates a higher impact. The figure may change our perspective, as Sydney’s Outer West, known to have relative disadvantage, is now in the highest category. Coffs Harbour, NSW Far West and North Adelaide are also in this category. On the other hand, the known areas with high advantages such as Northern Sydney and inner Perth are the areas that receive the lowest benefit based on this measure. There are some areas that have been considered to benefit from both measures such as South Australia and Queensland Outback. This is good news as these two areas are known to have many issues of disadvantages.
Source: ATO 2013-14 data, NATSEM’s calculation
Overall, the new Federal Budget has shown to give tax cuts by changing the tax bracket in the personal income tax. Given that the benefit will only be seen by those with incomes higher than $80,000 a year, it is unsurprising that poorer areas will have a lower benefit on average in absolute dollar amount. Nevertheless, if you look at the proportion of income that gets taxed, you may argue the areas of disadvantage may get slightly higher tax relief, when compared with their income level.
Whiteford, P. (2010). The Australian Tax‐Transfer System: Architecture and Outcomes*. Economic Record, 86(275), 528-544.