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FactCheck: Is 50% of all income tax paid by 10% of the working population?

"50% of all income tax in Australia is paid by 10% of the working population." – Federal Treasurer Joe Hockey, interview with Fran Kelly on ABC RN Breakfast, July 27, 2015.

According to the 2015-16 Federal Budget, Australians paid around A$176 billion in personal income taxation in the 2014-15 financial year (Table 5 of Budget Paper 1). The Treasurer, Joe Hockey, claims that around 50% of this taxation is paid by the top 10% of the working age population as ranked by their income.

NATSEM’s STINMOD model of the Australian tax and transfer system can be used to evaluate the accuracy of such a claim.

STINMOD, which stands for Static Incomes Model, is NATSEM’s model of taxation and government benefits. It simulates the taxation and government benefits system and allows us to evaluate current and alternative policies and how they would affect different family types on various income levels.

STINMOD is based on ABS survey data (Survey of Income and Housing) which provides a statistically reliable and representative snapshot of household and personal incomes and demographics.

Since the survey is a few years old, NATSEM adjusts the population in accordance with population and economic changes since the survey.

STINMOD is not publicly available, but as a NATSEM researcher, I was able to use the model to check Hockey’s claim against the evidence. STINMOD is benchmarked to taxable incomes data from the latest Australian Tax Office taxation statistics on the distribution of tax payments by income.

When I restricted the STINMOD base population to the working age population only (aged 18 to 65) and rank these people by their taxable income, I found that the top 10% (those with taxable incomes beyond $102,000 per annum) do pay around 52% of all personal income taxation.

Different measures, similar result

Since high income earners usually have greater scope for minimising tax through deductions, such as negative gearing, we can use an alternative income measure called “total income from all sources” to rank personal incomes. On this ranking, the share of personal income taxation paid by the top 10% drops to 50.5%.

Australia’s personal income taxation system is strongly progressive, with higher income earners paying both a higher marginal tax rate and average tax rate compared to lower income earners. According to STINMOD, the 90th percentile of working age taxable income is $102,000 per year, while the median taxable income is $39,000 per year. The average tax rate of the 90th percentile is 26.7% while that of the median tax payer is less than half that at 12.3%.

This analysis does include a large number of people who are of a working age but not in the labour force - around 21% of this population (2.9 million persons). These people are not in the labour market for a range of reasons such as disabilities, students, young parents or through personal choice or a range of other reasons. Removing these people from the analysis reduces the tax share to 46% paid by the top 10%.

In 2014-15, personal income taxation made up around 47% of all tax received by the federal government. Other taxes are paid to state and local government. While personal income taxation is highly progressive, the incidence of these other taxes tend to be less progressive, or indeed mildly regressive. One example is the GST, which makes up around 14.4% of federal taxation receipts.

Verdict

The Treasurer’s statement that the top 10% of incomes from working age persons pay 50% of personal income tax is correct. This reflects the progressive nature of Australia’s personal income tax system, which is applied to a society that features significant income inequality.

The progressive nature of income taxation in Australia plays a very significant role in altering the distribution of disposable income (after-tax) and provides Australia with a more equal distribution of disposable income.

Review

The FactCheck seems reasonable and correct. It benchmarks the ABS household income and expenditure survey against the official ATO Taxation Statistics, and then confines to working age (18 to 65), to test the Treasurer’s claim.

There were about 12.8 million individuals filing tax returns in 2012-13. The ATO Statistics in its “100 persons” picture of Australian taxpayers, explains that the top three taxable incomes paid 27% of all net tax and the top nine taxable incomes paid 47% in total - pretty close to the working age estimate.

I agree with the author that the FactCheck demonstrates Australia’s progressive income tax system, which has long been considered fair.

Australia has a high tax-free threshold of $18,200 so many working age low earners pay very little income tax. In contrast, New Zealand taxes from the first dollar of income.

And many working age people pay no income tax simply because they are unable to find a job - as Australia has an adjusted 6% unemployment rate.

Have you ever seen a “fact” that doesn’t look quite right? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at checkit@theconversation.edu.au. Please include the statement you would like us to check, the date it was made, and a link if possible.

 

Ben Phillips is Principal Research Fellow, National Centre for Social and Economic Modelling (NATSEM) at University of Canberra.

This article was first published in The Conversation and the original is here.

6 Comments
john
August 10, 2015

Re where Chris said
"as an individual, the harder you work and the more successful you are, the more tax you pay"

Actually what this says is not correct and it does not automatically follow this occurs. For numerous reasons which I wont go into now because they are self evident and because of time restraints. Who measures the aspect of "the harder you work" etc. Who accepts that one individual works harder than another etc etc. A person can work extremely hard and not receive justice in the sense of remuneration !

Nick
August 10, 2015

Below Ben's article, there is a response comment by Terry Reynolds in which he makes the claim (often made by Labor and others) that the Abbott government has made 80 billion dollar cuts to health and education. If ever there was a claim that requires fact checking, or at least clarification, it is this one.

Chris
August 07, 2015

I pay my fair share of tax, but what I do not understand is that as an individual, the harder you work and the more successful you are, the more tax you pay.

It should be the other way around, because if you are working hard, you are adding to the GDP of this nation. Why should an employee be penalized for being good at their job and earning lots of money ?! Tax pays for schools, hospitals, roads etc., but it is not like a successful person uses "more road" than a blue collar worker.

Graham Hand
August 07, 2015

Hi Mark, 1.5% of adults pay 26% of personal income tax, according to this article:
http://cuffelinks.com.au/how-much-income-tax-do-you-pay/. Numbers are somewhat dated but would not be materially different.

Mark
August 07, 2015

Interesting information.

Given the focus on the "1%" these past few years, I would have been curious as to how much tax is paid by the top 1% of the population. Do they pay 10% of all taxes? 20%? I'm guessing they pay their "fair share", despite all the criticism.

Terry Reynolds
August 07, 2015

Yes, and if the high income earners were paying tax at the 2004 rates, we would have had no public debt, balanced budgets, no $80B cut to educations and health over then years by the Abbott Government and no need to sneer at Speaker Bronwyn Bishop for allegedly taking five Liberal party guests in her now infamous helicopter ride to Geelong and promptly covering it herself when exposed. We would not have had to suffer the treasurer speaking to the world saying the days of entitlement are over as they look at him speaking as someone who has just been given the Treasurer's role in en economy he had no role in managing through the GFC. A man who called that Government the w worst ever!

After watching the abysmal performance of former Senator Boswell on the ABC's "Q and A "last night, a National Party relic who retired eight years ago, but is still mouthing the Abbott line, means we are getting no where on the tax debate. Raising the GST rate is a furphy to get people minds off the fact that the rich are underperforming in the fair tax contribution game.

Aggregates show a statistic and a percentage but don't tell the full story.

 

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