Over the last 21 years, the highest earners received the most tax relief

From 1 July 2024, the Government’s revised Stage 3 income tax cuts come into force. The revised cuts will deliver a tax reduction to anyone earning more than $AU18,200 per year.

Those lucky enough to be earning $190,000 or more will see their income tax reduced by $4,529, although it is actually people earning $135,000 who will see the biggest percentage increase in their income (a 2.8 per cent increase).

Despite the broader benefits of the revised Stage 3 tax cuts, they only partially address the bracket creep that has been occurring since 2011.

With the recent surge in inflation, Australians will continue to see an increasing share of their income swallowed up by tax due to bracket creep, says Professor Roger Wilkins, Deputy Director of the Melbourne Institute : Applied Economic & Social Research and HILDA Survey Co-Director.

The HILDA Survey follows the lives of more than 17,000 Australians each year, over the course of their lifetime, collecting information on many aspects of life in Australia, including household and family relationships, income and employment, and health and education.

Bracket creep and inequality

“Over time, inflation, wages and income go up, and if income tax rates and tax thresholds aren’t changed, the result is that the average share of a person’s income that disappears in tax increases,” explains Professor Wilkins.

The latest annual Household, Incomes and Labour Dynamics in Australia (HILDA) Survey found changes to income tax rates and tax thresholds over the past 21 years have not had an equal impact on all people.

The majority of Australians – those earning income that puts them in the top 70 per cent of earners – have been negatively impacted by bracket creep. Those in the top 10 per cent of incomes have received significantly greater tax relief than Australians with smaller pay packets.

“On average, income tax has gone down during the past 21 years, so there is a dissonance around people thinking they pay too much tax and what has actually happened.

“But the average tax rate has fallen most for people in the top 10 per cent of incomes,” says Professor Wilkins.

Income tax rates

HILDA shows that from 2001 to 2021, the average income tax rate across all adults was approximately 11 per cent. The average income tax rate declined from 2006 to reach a low of 8.5 per cent in 2011.

Since then, it has edged upwards again.

HILDA found average tax rates were highest for people in the prime working-age years of 25 to 54. However, the average tax rate for people aged 55 to 64 has risen substantially since 2010 – indicating more people in this age group are remaining in the workforce, either through choice or necessity.

In contrast, the average tax rate of people aged 15 to 24 declined from 9.3 per cent in 2006 to 4.3 per cent in 2014 – largely explained by changes to the income tax schedule that reduced income tax payable by relatively low-income earners.

This decline may also be partly due to a drop in the rate of full-time employment in this age group as more young people remain in education after high school.

“It is also taking school leavers and graduates longer to get into full-time work and to get on a career track and this could also be a contributing factor,” adds Professor Wilkins.

HILDA found that 2020 marked a brief decline in income inequality, largely because of the Government’s response to COVID-19, predominantly the JobKeeper Payment introduced on 30 March 2020 that enabled eligible Australians to receive a payment of $AU750 per week.

HILDA also found that while males have higher average income tax rates during the prime working age of 25 to 54, the gender gap has narrowed and women’s average income tax rates have gradually increased.

“In the past few years, there has been a narrowing of the gender wage gap and more women are working more hours,” says Professor Wilkins.

Unsurprisingly, incomes are highest in capital cities with people living in Sydney, Melbourne, Brisbane and Perth paying more income tax.

“Adelaide is a standout as its income levels are similar to other regions outside the capitals.

“It’s unclear whether that is because wages are lower or employment participation is lower there. Other mainland capitals have had high population growth and Adelaide hasn’t, which may indicate some economic stagnation in Adelaide,” says Professor Wilkins.

What lessons can be learned from the latest HILDA insights? Professor Wilkins believes there is room for reform with the issue of bracket creep needing to be addressed to ensure greater equality.

Food for thought

“Higher inflation since 2021 has exacerbated the issue of bracket creep and so I’d expect average tax rates to rise more sharply. The Stage 3 income tax cuts don’t fully address this,” he says.

“The income tax system is doing slightly less to reduce inequality than it was 20 years ago. Anyone earning under $AU95,000 is being unduly burdened by an increase in their average taxes.

“Lowering the average income tax rates of middle to low-income earners should be a priority for income tax reform.

“Currently, benefits are mostly going to high-income earners, so introducing measures to reduce the tax burden further down the income distribution chain would make an important difference to the lives of many more Australians.”

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