Trashing the 37c Tax Bracket

I seem to be the only one, that I have seen anyway, in the Australian blogosphere who is excited about the 37c tax bracket going the way of the dodo in Labor’s tax policy announcement. Peter Martin even suggested it might be bad politics. Hopefully this policy becomes ‘common wisdom’ and the removal of the 37c tax bracket enacted no matter who the party in power is as it simplifies the tax system drastically and removes bracket creep for many income tax payers. Some graphs to visualise what a tax system without the 37c bracket would look like. The data for these graphs is from the 2003-2004 Tax Statistics which is the most up-to-date data publicly available from the ATO.

Note that the 30c tax bracket under Labor’s 2013 policy stretches from 37K to 180K. It becomes a long tail tax with the 15c bracket covering the head of the taxable income curve. The 40c bracket in raw numbers covers a very small minority of taxable individuals.

The 30c bracket under Labor’s 2013 policy is carrying the major burden of taxation. This is partly because they carry a large percentage of taxable income but also because the tax bracket is so wide. This is a good thing in my opinion as it stops bracket creep for a large number of income earners: nearly 4 million.

In terms of numbers of tax payers the majority are in the 15c and 30c brackets. It is interesting how little is raised directly from those purely in the 15c bracket; it is less than the yearly defence budget, however it is over 4.6 million income earners. If that tax bracket can be removed then it would simplify the tax system further such that 4.6 million Australians would not need to lodge an income tax form. I think that is a better solution than the tax office doing it automatically which is a policy I have seen proposed around the blogs.

The 37c tax bracket is mainly there for tax creep. It is good policy in my opinion to remove it and simplify the income tax brackets. I like that call.

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11 Responses to Trashing the 37c Tax Bracket

  1. Len says:

    Removing tax brackets also makes the tax system less progressive…

  2. Richard Green says:

    I don’t accept that bracket creep is anywhere and everywhere a good thing.

    If higher wages shift wage earners into higher brackets, then the spending power associated with those wages is almost instantly siphoned out of the system, and takes the heat off demand pull inflation.

    Which is preferable to a system of fighting demand pull inflation through monetary policy, which has the lag of decision making whilst waiting for a meeting and/or data, and which is also incredibly blunt, reducing the disposable income of all debt holders whether income is increasing or not.

    Maintaining a progressive, unindexed, tax system is a simple, automatic stabaliser without the foibles of human interference. Much better to use it now than force the RBA to use a sledgehammer with monetary policy later.

  3. cam says:

    The current 40c bracket (37c bracket by 2012 in the Labor policy) is between 75K and 150K. You can see in the first graph how few people it catches. It has lost its purpose as a high-end bracket. Making 180+ that bracket makes more sense. 75K is also becoming a standard urban salary for professionals as well. Removing that bracket helps remove complexity for them – and given the cost of living in the likes of Sydney, 75K isnt that high a salary anymore.

  4. Patrick says:

    On Chester’s behalf I should point out that you are very close to endorsing the LDP’s 30/30 tax policy here.

  5. cam says:

    Patrick, I would be happy if there was a two tier system where there was 0c tax for the first half of all income and a 30c tax for the second half of all income.

  6. cam says:

    Should clarify, the first half of all income not meaning an individuals income, but the total of all income that is taxable, I think that is about the 41K mark (in 2006 anyway). So the 30c tax would not kick in until an individual earnt over that amount and then it would be 30c on every dollar beyond that point.

  7. Patrick says:

    LDP 30% tax kicks in on every dollar over $30k, but if you earn less than $30k you are eligible for a 30% negative income tax (NIT), up to $9k if you have no income.

  8. Jacques Chester says:

    Maintaining a progressive, unindexed, tax system is a simple, automatic stabaliser without the foibles of human interference. Much better to use it now than force the RBA to use a sledgehammer with monetary policy later.

    I do so love it when smart people come up with smart excuses for harmful policies.

    For extra marks, please explain how bracket creep also prevents inflation caused by a booming world economy, massive M3 expansion by the USA and high oil prices.

  9. Doctor Patient says:

    I refuse to get excited until Labor declares a public holiday to celebrate the death of the 37c tax bracket.

  10. Niall says:

    I’m all with you Cam. This is a part of the reforms required to our PAYG tax system. Now all we really need is a GST which is a real GST, replacing all the indirect taxes we’re still paying, and we might be on the road to shared prosperity

  11. Beats me what’s good about it. Progressivity is good in a tax system – if you believe in that kind of thing – but it comes with the downside of fiscal drag or tax creep. So abolishing the 40-37% rate reduces progressivity – and to the same extent that it does that it reduces the scope for fiscal drag. An entirely flat tax removes it entirely. So what?

    The two things, progressivity and fiscal drag, are two sides of the one coin – simple as that.

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