Introduction

Currently there is much debate about income tax rates and whether further income tax cuts should be made. One aspect of the debate has focused around the upper end of the tax rates scale and whether the taxpayers in the top tax bracket should have their marginal tax ratethe rate at which each extra dollar of taxable income is taxedreduced and/or the income threshold (level) at which this marginal rate takes effect increased.

A recent survey conducted by Newspoll found that half the respondents thought the top rate was too high.⁽¹⁾ Also, CPA Australia, the Institute of Chartered Accountants and the Australian Industry Group have all put forward proposals that include changes to the top tax bracket.⁽²⁾

This Research Note provides current and historical statistics on taxpayers in the top tax bracket.⁽³⁾

Taxpayers

This information in this note relates to taxable individuals: those taxpayers who, at the end of the financial year, have to pay tax, i.e. have (net) tax greater than zero dollars.⁽⁴⁾ Table 1 shows the total number of taxable individuals and the number and proportion who pay tax at the top marginal tax rate. The information is only shown from 196970 because taxables by grade of taxable income were not published prior to that date.

In 196970when there were 29 tax rates (brackets) in the income tax scale and the top rate of 68.3675 per cent⁽⁵⁾ cut in at the high income level of $32 000only 0.05 per cent, or five in every 10 000, of taxables were in the top tax bracket. By 19992000, this proportion had increased to over 17 per cent. The following year, income tax cuts in the ANTS package⁽⁶⁾ saw this proportion fall below 12 per centstill an historically high level.

Graph 1 plots the proportion of taxables in the top tax bracket and compares this with their proportional contribution to the individuals income tax paid (discussed below). The large drop in the proportion of taxpayers (and tax paid) between 198889 and 198990 was the result of the almost 43 per cent increase in the income threshold from $35 000 to $50 000. In comparison, the next income threshold increase (to $60 000) 10 years later in 200001 was only 20 per cent.

Income threshold

In 195960, the top tax rate applied to taxable incomes of more than $32 000. This income threshold remained unchanged until 196970. Although the top bracket income threshold has generally increased since then to the current level of $62 500, as a multiple of average earnings⁽⁷⁾ it has fallen dramatically.

Graph 2 shows that in 195960 the taxable income level of the top tax bracket was almost 15 times average earnings; in
196070 it was nearly 9 times; and by 200203 it has fallen to a mere 1.3 times.

This point is further illustrated in Table 1, if the top income threshold had been indexed from 196970 for inflation (as measured by the CPI in the previous financial year), then the top marginal tax rate would now apply when taxable income is over $268 647.

Marginal tax rate

Currently, an individual with taxable income greater than $62 500 per annum has a marginal tax rate at a nominal 47 per cent; the actual marginal rate is 48.5 cents per dollar when the Medicare levy is included (and is 49.5 per cent if a taxpayer pays the Medicare levy surcharge because they do not have private hospital cover).

Graph 3 shows the nominal and actual marginal tax rates for the top tax bracket since 196970. The major overhaul of the income tax rates scales that occurred in the mid to late 1970s, when the number of tax rates fell from 29 to three (see Table 1), saw the start of the gradual reduction in the top tax rate from over 68 cents in the dollar to todays 48.5 cents.

Tax paid

Even though income thresholds have increased over time and the top tax rate has been reduced, Graph 1 shows that because an increasing proportion of individuals are moving into the top tax bracket they are contributing a larger proportion of the total (net) tax paid.

In 197677, 9 per cent of individuals tax was paid by the top taxpayers, but by 198990 they were paying 42 per cent. This proportion fell to under 25 per cent the following year, due mainly to the large increase in the income threshold (mentioned earlier), but 8 years later, by 199798, bracket creep had the proportion above that in 198889 and in 19992000 the top taxpayers were paying over 50 per cent of the individuals income tax bill.

Conclusion

The major structural changes to the income tax rates scales in the mid to late 1970s were an attempt at simplification. Annual indexation of the income thresholds, introduced in
197677, was to maintain fairness and reduce the effect of bracket creep but was relatively short-lived.⁽⁸⁾ The combination of reducing the number of tax rates and the lack of indexation (after 198182) produced the rapidly increasing proportions of taxpayers entering the top tax bracket.

The late 1980s saw reductions firstly in the top tax rate and subsequently in the top income threshold. This eased the situation but, after a decade of inactivity to either the top rate or income threshold, the result for the top taxpayers was worse than in the late 1980s.

The tax cuts of 200001 did not alter the situation significantly and further tax cuts this year will probably only maintain the current situation for the top taxpayers.

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