Minister for Revenue and Financial Services Kelly O’Dwyer says that the Government’s tax relief is focused on people who earn $90,000 or less, the majority of which are women. (ABC News: Mark Moore)
In the midst of a tax cut bidding war ahead of the federal election, debate recently turned to the question of whether the Turnbull Government’s tax package is fair — not only to lower and middle-income earners, but also to women.
In June, the independent Parliamentary Budget Office released calculations showing the Government’s three-stage tax plan would cost the budget almost $144 billion in foregone revenue over 10 years.
Of that, according to the analysis, $92 billion would flow to men — equivalent to about 64 cents for every $1 of tax relief provided.
The findings provoked a strong response from all sides of politics.
“You don’t get a blue and a pink form to fill out your tax return,” Mr Morrison said.
“There aren’t different tax rates that apply to males and females. You get assessed on your income and … it doesn’t discriminate.”
Kelly O’Dwyer, the Minister for Revenue and Financial Services, and Minister for Women, joined the debate, tweeting that the Government’s tax cuts were “good for women” because the tax relief focused on those people earning $90,000 or less.
“About 86 per cent of female taxpayers have a taxable income of $90,000 or less, and that is where the Government’s tax relief is focused.”
Are the tax cuts really “focused” on incomes of $90,000 or less? And is this specifically good for women? RMIT ABC Fact Check investigates.
Ms O’Dwyer’s claim is misleading.
While it is accurate to say 86 per cent of female taxpayers have a taxable income of $90,000 or less, the argument that this is where the Government’s “tax relief” is “focused” is problematic.
Only the first tranche of measures, beginning this financial year, favour people with taxable incomes of $90,000 or less. It is, however, important to point out that very low-income earners do not benefit because they pay little or no tax (moreover, a greater proportion of these very low wage earners are women).
Meanwhile, the second and third stages of the tax plan, beginning July 1, 2022 and July 1, 2024, unambiguously favour people on higher incomes.
This holds using several measures to gauge the meaning of “focus”, including the dollar value of the tax relief provided to different income groups; the share of the cost of the package apportioned to different income groups; the share of the tax burden carried by different income groups before and after the introduction of the tax package; and, the impact of the package on disposable incomes for different income groups.
Fact Check does not make a judgment about the fairness or otherwise of the tax package. Nor does it make a judgment about the affordability of the plan; nor the Government’s spending priorities.
What is clear, however, is that only the first stage of the tax plan is focused on people with annual incomes up to $90,000.
It is possible that, in using the word “focused”, Ms O’Dwyer meant the group of taxpayers earning up to $90,000 were being prioritised by receiving the first tranche of tax relief. However, she did not make this clear.
Taken in its entirety, over seven years, the bulk of the benefits of the plan will flow to people earning more than $90,000 and, at the end of this period, those earning more than $90,000 will carry a smaller share of the overall tax burden. A clear majority of these taxpayers are men.
The government’s tax plan
The Government’s tax plan — reportedly the largest ever proposed in a federal budget — would be delivered in three tranches, the first beginning in 2018-19, the second in 2022-23 and the third in 2024-25.
Treasurer Scott Morrison said that, under the plan, about 94 per cent of all taxpayers would face a marginal tax rate of 32.5 per cent or less in 2024-25.
“This compares with a projected 63 per cent of taxpayers in 2024-25 under current settings, without change,” he said.
The package is best understood by separating its components into seven parts. These have been summarised by the Parliamentary Budget Office.
Measures introduced July 1, 2018:
- A new low and middle-income tax offset of up to $530 a year through 2021-22 for individuals with taxable incomes up to $125,333
- A rise in the income ceiling for the 32.5 per cent marginal tax rate — from $87,000 to $90,000.
Measures from July 1, 2022:
- A rise in the income ceiling for the 32.5 per cent marginal tax rate — from $90,000 to $120,000
- A rise in the income ceiling for the 19 per cent marginal tax rate — from $37,000 to $41,000
- An increase in the Low Income Tax Offset (LITO) by up to $645 for taxable incomes up to $66,667.
Measures from July 1, 2024:
- A rise in the income threshold for the 45 per cent marginal tax rate — from $180,001 to $200,001
- Removal of the 37 per cent marginal tax rate, so that all income from $41,001 to $200,000 is taxed at 32.5 per cent.
Testing the claim
The proposition that “86 per cent of female taxpayers have a taxable income of $90,000 or less” is easily verified by drawing upon the Australian Taxation Office’s Taxation Statistics, an annual publication providing detailed information on incomes, tax paid and numbers of taxpayers in various income groups, among other things.
However, the proposition that the government’s tax relief is “focused” on the group of taxpayers earning $90,000 or less is more complex.
Fact Check takes Ms O’Dwyer’s use of the word “focused” to mean that the Government’s tax relief has been directed towards taxpayers earning $90,000 or less, as opposed to people earning more.
To assess this claim, Fact Check relied on four measures:
- The reduction in tax paid by various income groups;
- The proportion of the total cost of the package (government revenue foregone) flowing to people with taxable annual incomes up to $90,000;
- The share of the total tax burden for those with taxable incomes of $90,000 or less;
- Changes in disposable income as a result of the tax package.
In her tweet, Ms O’Dwyer refers to “the Government’s tax relief”. She also refers to “tax cuts” (plural).
The Minister does not make clear whether she is referring to the first set of measures that began on July 1, 2018, or the tax package as a whole.
As experts pointed out, the tax package is complex; different components affect different income groups at different points during its implementation.
Because the proposed measures would be introduced over seven years, the analysis is further complicated by the impact of bracket creep, where inflation gradually pushes workers’ incomes into higher tax brackets, increasing average tax burdens.
According to experts consulted by Fact Check, even in the absence of the tax changes, bracket creep would make the tax system less progressive over time. Tax models show that the tax package would only partially reverse the impact of bracket creep.
The proportion of women on taxable incomes of $90,000 or less
An analysis of the latest Australian Taxation Office data for 2015-16 shows there were 3.98 million female taxpayers who earned $90,000 or less.
This is equivalent to 86 per cent of the total of 4.63 million, which accords with Ms O’Dwyer’s assertion.
The cash — who gets what
Perhaps the most straightforward way of assessing the relative benefits of the tax package is to examine the reduction in tax for different income groups. These figures have been published by Treasury.
The following table summarises the reduction in the annual tax liability for each stage of the package’s implementation, the first beginning in 2018-19, followed by the second (2022-23) and third (2024-25).
Ms O’Dwyer refers in her tweet to taxpayers on incomes of “$90,000 or less”. As can be seen in the table, the measures that came into effect on July 1, 2018 (a new low and middle-income tax offset and a higher income ceiling for the 32.5 per cent tax rate), deliver the greatest benefits to these taxpayers.
They include an annual saving of $665 for people earning $90,000, which is the biggest benefit for any income group in this first phase — almost five times the $135 tax cut for people earning more than $130,000 a year.
However, once the second and third phases of the tax plan are introduced, the benefits for people on incomes of up to $90,000 would increase only marginally (by $10 a year, or 19 cents a week) to $675.
This stands in contrast to the significant gains for taxpayers earning more.
For example, by 2024-25, a taxpayer earning $180,000 would receive an annual benefit of $4725 — about seven times that of a taxpayer earning $90,000. Those earning $200,000 would receive a benefit of $7225, almost 11 times greater.
The disparity is equally apparent in percentage terms: a 3 per cent reduction in tax liability for someone earning $90,000 compared to a 9.6 per cent reduction for people on incomes of $190,000 and 10.7 per cent for those on $200,000.
While the $455 reduction in tax for someone earning $40,000 also represents a cut of 9.2 per cent, most income groups below $90,000 are poised to get more modest savings under the plan.
Low-income earners — those earning $30,000 or less — receive little or no benefit, ostensibly because they already pay little or no tax.
The total cost of the package: who gets what
Another way to determine where the Government’s tax relief is focused is to examine how the cost to the Government (the benefit to taxpayers) is shared between different income groups.
Detailed analysis by the Grattan Institute provided to Fact Check shows that the 82 per cent of taxpayers who earn less than $90,000 would account for about 42 per cent of the total cost of the tax package by 2027-28.
On the other hand, the remaining 18 per cent of taxpayers (those earning more than $90,000) would account for around 58 per cent of the cost of the tax cuts.
Grattan Institute tax expert Danielle Wood pointed out that the benefits in terms of tax revenue forgone for people earning more than $90,000 (in today’s dollars) would further increase over the decade.
“In particular, the removal of the 32.5 cent tax bracket only occurs in 2024-25. In other words, the share of the total cost of the tax cut going to those earning more than $90,000 today will be higher beyond 2024-25,” Ms Wood said.
Modelling work by the Grattan Institute shows that under the plan, by 2027-28, about $64.5 billion of revenue would be forgone that would otherwise have been collected from people earning up to $90,000 a year.
On the other hand, the revenue forgone for those with taxable incomes of more than $90,000 would be about $87.4 billion — 35 per cent more.
The tax burden: who carries what
The Grattan Institute’s analysis shows that the overall tax burden carried by taxpayers earning up to $90,000 a year will increase once the tax package is introduced.
Specifically, the share of tax paid by workers with taxable incomes of up to $90,000 is expected to rise from 35 per cent to 38 per cent by 2027-28, according to the institute’s modelling.
The share for those earning more than $90,000 would shrink from 65 per cent to 62 per cent.
“In other words, low and middle-income earners will bear a somewhat higher share of the income tax burden than they do today,” Ms Wood said.
“But it’s fair to note that if the government had done nothing and left tax rates and scales unchanged, bracket creep would have a similar effect in making the tax system less progressive over time.
So the plan doesn’t much exacerbate — but also doesn’t reverse — the march of bracket creep in undermining progressivity.”
A similar analysis carried out by the Australian National University’s Centre for Social Research and Methods found the top 10 per cent of taxpayers would pay a lower share of tax by 2027-28.
Associate Professor Ben Phillips, a principal research fellow at the centre, said the Coalition’s tax plan was tilted more towards this group of taxpayers than those on lower incomes.
“That said, they can still expect to pay a higher rate of taxation since bracket creep is not fully compensated for with the tax cuts for most income groups,” he said.
A research paper released by the centre immediately after the budget concluded: “The targeting of the tax cuts more strongly favours higher income households over lower income households where the cuts are much more modest (both in dollar and percentage terms).
“However, it is important to remember that average tax rates of middle to higher-income households are still projected to increase over the next decade.”
Changes in disposable income
Another way of determining the target of the tax Government’s relief is by examining changes in disposable income for various income groups.
Modelling work carried out by the National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra shows the impact on disposable income of the different stages of the tax plan.
The analysis also takes into account all proposed tax and transfer policy measures, including the removal of the planned Medicare Levy increase.
NATSEM Associate Professor Jinjing Li said that, in absolute terms, high-income earners were most likely to benefit from the tax package once it was fully implemented.
However, Dr Li said the measures put in place for 2018-2019 would mostly benefit middle-income earners, while low-income earners would benefit less because they pay little or no tax.
As can be seen in the above chart, once the tax package is fully introduced, the biggest gains go to households with annual pre-tax incomes of about $280,000, followed by households earning $360,000.
This group will benefit from an increase in disposable income of about 4.5 per cent.
Meanwhile, households with pre-tax disposable incomes of $90,000 would gain about 2 per cent on full implementation of the tax plan.
Ms O’Dwyer’s claim refers to individual taxpayers, rather than households. In a broad sense, however, the NATSEM modelling suggests that only the first tranche of the tax plan benefits middle-income taxpayers more than those on higher incomes; that is, those with taxable incomes of up to $90,000.
What the experts say
Ms Wood said it did not make sense to say the Government’s tax relief was “focused” on those earning less than $90,000.
“The package is complex — it’s implemented in three stages over seven years, and introduces a new tax offset as well as lifting tax brackets,” she said.
“But the majority of tax relief in dollar terms goes to the 20 per cent of taxpayers earning more than $85,000.
“Grattan estimates that in 2027-28, 70 per cent of revenue forgone under the package is from tax cuts for the highest 20 per cent of income earners.”
Ms Wood said this was not surprising, as high-income earners pay the most tax and will always receive the biggest benefit from tax cuts.
“But Grattan analysis also suggests that the package will reduce the share of total tax paid by the top 20 per cent of income earners by 2027-28.”
She said about 3 per cent of the tax burden would be shifted from the top 20 per cent of income earners to those lower down the income distribution.
“So the tax relief disproportionately benefits higher-income earners who are disproportionately men.”
Associate Professor Phillips estimated the tax package would lead to savings for taxpayers worth $140 billion over the decade to 2028-29.
Of this, he said about two in every three dollars would go to men, which was roughly in proportion to the amount of tax paid.
He said the tax cuts would still leave taxpayers paying higher rates of tax by 2027-28 thanks to bracket creep.
According to the centre’s model, by 2027-28 average tax rates for males would rise from 23.9 per cent to 25.6 per cent. For women, average tax rates would rise from 17.1 per cent to 19.6 per cent.
“Bracket creep impacts females more than males and, regardless of whether the tax plan is implemented, the tax share of women will increase and [that of] males will decline. The tax plan does little to overcome this problem, but it does lower tax rates relative to where they otherwise would be for both males and females,” he said.
Professor Li pointed out that it was possible that Ms O’Dwyer in her tweet was referring only to the first set of tax measures, which came into effect on July 1, when claiming that the tax relief was good for women and focused on incomes of $90,000 and less.
Principal researcher: Josh Gordon
- Parliamentary Budget Office, Advice provided to Senator Ketter, Senate Economics Legislation and Reference Committee, June 13, 2018
- Parliamentary Budget Office, Advice provided to Senator Ketter, Senate Economics Legislation and Reference Committee, June 5, 2018
- Parliamentary Budget Office, Advice provided to Senator Ketter, Senate Economics Legislation and Reference Committee, June 6, 2018
- Scott Morrison, Interview with Ross Greenwood, 2GB, June 6, 2018
- Scott Morrison, Media Release, May 8, 2018
- Australian Taxation Office, Taxation Statistics 2015-16
- Federal Treasury, Personal Income Tax Plan – further information
- Danielle Wood, John Daley, Hugh Parsonage, Submission to the Senate Economics Legislation Committee inquiry into the Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018, Grattan Institute, 2018
- Ben Phillips, Richard Webster, Matthew Gray, Modelling of the 2018-19 Federal Budget Personal Income Tax Measures, ANU Centre of Social Research and Methods, May 10, 2018
- NATSEM, How does the budget affect us?, University of Canberra, 2018
- NATSEM, STINMOD+ Online Family Impact Model (Beta), University of Canberra