ESSAY 12: FEDERATION REFORM # 3.5
LONG TERM RATES FOR PERSONAL INCOME TAX
Background
This is the final of our series of essays on Federation Reform (Essays 6 to 12) which propose to:
1. Remove generations of decay from Australia’s federal system of government; 2. Make each level of government accountable for raising money it spends;
3. Impose accountability on voters for the quality of governments we choose; 4. Encourage all voters to demand wisdom in government spending;
5. Motivate personal effort by halving the burden of income tax.
The main purpose of this essay is to outline an option for implementing item 5. It also offers contribution on Items 2, 3 and 4.
Proposals
Essay 10 proposed that the Federal Government halve its revenue from personal income tax and finance same by ending almost all its funding of the states, who would ‘raise their own money’.
How such change in overall personal income tax revenue, might ultimately best compare to current personal income tax scales, is beyond scope of this essay.
What follows is merely offered as a conceptual ideal, for long term personal income tax rates.
An option for benchmark/target personal income tax rates
Tax brackets determined by reference to Australia’s median (not average) National Personal Income (as published by the Australian Bureau of Statistics).
The median National Personal Income (“MNPI”) for 2018-19 was $51,389. The ABS statistic might be used for defining tax rates for two years later, ie 2020-21.
Ignoring the impact of any Medicare Levy and/or any Low Income Tax Offsets, the rates proposed below result in reduced personal tax for all incomes from $21,000 to $825,000 per annum (relative to rates applicable for resident taxpayers for the 2020-2021 tax year).
| MNPI Tax Bracket | NPI $ Equivalent | Marginal Tax Rate |
| Up to one-half of “MNPI” | $ NIL to $25,694 | 2.5% |
| Over one-half of “MNPI” | $25,689 to $51,389 | 10% |
| Over “MNPI” | $51,389 to $102,778 | 15% |
| Over double “MNPI” | $102,778 to $154,167 | 20% |
| Over triple “MNPI” | $154,167 to $205,556 | 30% |
| Over 4 times “MNPI” | $205,556 to $256,945 | 40% |
| Over 5 times “MNPI” | Over $256,945 | 50% |
Below are examples of the corresponding % reductions in personal income tax.
| Personal Income (resident taxpayer) | Reduction in Income Tax |
| $25,000 | 55% |
| $50,000 | 45% |
| $75,000 | 50% |
| $100,000 | 51% |
| $125,000 | 49% |
| $150,000 | 48% |
| $175,000 | 44% |
| $200,000 | 41% |
| $300,000 | 25% |
| $400,000 | 14% |
| $500,000 | 8% |
Comments on tax free threshold
The logic of excluding as many people as possible, from needing to interact annually with the Australian Taxation Office, is superficially appealing.
However in the long run, lower tax rates can only be sustained through lower government spending. The greater the proportion of voters paying personal income tax, the greater the proportion who are investing in government. The more voters who invest in government, the more who wish to see it perform.
Comments on single low flat tax rate
Arguments for flat taxes overlook equity of progressive tax systems and reality that (in most democracies) sustainability of a low flat income tax is illusory.
Comments on Tax Brackets referable to “Median National Personal Income”
One advantage, of choosing to set tax brackets by reference to “Median National Personal Income” is to ‘culturally set in stone’, so far as practical, the income tax reductions which are achievable, as part of a once-off overhaul of our federation.
A publicly understood exception to this ‘long term fixing of personal income tax rates’ could be, whenever Federal Government’s ‘recurrent spending’ for a given year exceeds ‘a previously budgeted recurrent spending for that year’.
A ‘National Income Levy’ might then be triggered: A flat levy applicable to all voters, not only voters on high incomes – of such date and duration required – for Federal Government to balance an ‘earlier-overspent-recurrent-budget’. The earlier budget might be any budget (for that year) set by any government.
This proposal is aimed at encouraging Smaller Government by impressing on all voters, that ultimately, we are the only source of our ‘commonwealth’; and at encouraging federal government to keep recurrent expenditure ‘on budget’. This essay does not dwell on either the politics or economics of this proposal.
Transition
The proposals would be implemented on same day as the federal government terminates ‘untied’ grants (inclusive of GST) to states and territories.
Additional Comments
The proposals are one part of massive reform of our federal system of government.
Counter arguments
Proposals in this essay for personal income tax rates are conceptual. We have not sought to identify counter arguments against specific rates.
For and on behalf of Common Sense for Australia Inc
Authorised for publication, 17 February 2022