What the Coalition’s tax plan means for high-income earners and the tax system

Treasurer Josh Frydenberg has been dodging questions on how much high-income earners will benefit from his tax plan and what it means for the progressivity of Australia’s tax system.

He can dodge no more. The tax cuts mean someone earning $180,000 in 2024-25 will pay $8,640 less tax per year than they do today. The tax cuts for people earning more than $180,000 will cost the budget $90 billion over the next decade. And the overall effect is to make Australia’s tax system less progressive.

The aggregate numbers

Under the Coalition’s plan, people earning more than $180,000 will pay $90 billion1 less in income tax over the decade to 2029-30. They are among the top 5-10 per cent of income earners (if you want to know how much the typical Australian earns, see this post). This cut amounts to about 30 per cent of the total tax cuts over the decade (see the chart below).

For those in the top tax bracket (which is now $180,000 but rises to $200,000 in 2024-25 under the Coalition’s policy), the benefit is $74 billion.2

But people’s incomes grow over time, so a better measure is how the share of tax paid changes over time for people at the top, middle and bottom of the income spectrum.

How the plan changes the share of tax paid

Under the Coalition’s plan, the share of tax paid by people in the top 20 per cent of taxable incomes will fall, from 68 per cent today to 65 per cent in a decade. The share of tax paid by people in the middle 60 per cent of the income spectrum will increase, from 32 per cent today to 35 per cent in a decade.

Yet the Treasurer has said: “Under our plan, it is very clear the progressive nature of our tax system is not only maintained, it is strengthened… the top 5 per cent of taxpayers, which equates to the top rate of marginal tax you’re referring to, end up paying more of the overall tax burden”.

On the face of it, the Treasurer looks to be wrong. As the table below shows, the share of tax paid by the top 5 per cent of tax-filers will fall, from 37 per cent today to 35 per cent in a decade.

But let’s give the Treasurer the benefit of the doubt – he may be using a different point of comparison. If, instead of comparing to today, we compare to a future world where there were no changes to tax rates and thresholds (i.e. where bracket creep was left to run wild), then we get a different answer. In that world, the share of tax paid by the top 5 per cent at the end of the decade under the Coalition’s plan (35 per cent) is slightly larger than the share paid by the same group under bracket creep (34 per cent). If this is the Treasurer’s point of comparison, he should say so.

Or perhaps the Treasurer is referring to people on the top rate of marginal tax over time, rather than the top 5 per cent of income earners. The share of tax paid by people in the top tax bracket increases over time because there will be a lot more people in that bracket by the end of the next decade (rising from about 5 per cent of tax-filers today to about 8 per cent by 2029-30).

Either way, our recent analysis in The Conversation, and the chart below, show that the Coalition’s tax plan would make Australia’s tax system significantly less progressive over the decade.

Co Authors :

  1. Or $89 billion less relative to Labor’s tax plan. The difference is because Labor plans to keep the new $90,000 tax threshold (up from $87,000 as at 1 July 2018), which benefits everyone earning more than $87,000.
  2. Or $73 billion relative to Labor’s plan. The difference is because Labor plans to keep the new $90,000 tax threshold (up from $87,000 as at 1 July 2018), which benefits everyone earning more than $87,000.