Rich pay half their income in tax? > Check the facts
Earlier this week, data released by Treasury under a Freedom of Information request, were published in the media that showed Treasury predictions the Abbott Government’s budget measures were likely to hit lower income households harder than higher income households. In response, Treasurer Joe Hockey said “higher income households pay half their income in tax”. Check the facts below; no one is paying half their income in tax.
In making this claim, Mr Hockey has confused marginal tax rates with average tax rates.
Marginal tax rate is the amount of tax paid on each dollar earned over a tax bracket threshold. The income tax brackets and marginal tax rates for 2014-15, which apply from 1 July 2014, are listed in the table below.
| Taxable income | Tax on this income |
| 0–$18,200 | Nil |
| $18,201–$37,000 | 19c for each $1 over $18,200 |
| $37,001–$80,000 | $3,572 plus 32.5c for each $1 over $37,000 |
| $80,001–$180,000 | $17,547 plus 37c for each $1 over $80,000 |
| $180,001 and over | $54,547 plus 45c for each $1 over $180,000 |
The top marginal tax rate is 45 cents in the dollar. This marginal tax rate is applied to incomes over $180,000 per year. It is not the tax rate paid on income up to $180,000.
When you add to this the 2% Medicare levy and 2% temporary budget repair levy, you get a marginal tax rate of 49%. This is presumably what Mr Hockey was referring to when he said higher income earners pay half their income in tax.
However, marginal rates of tax are not the same as average rates of tax.
Average tax rate is the ratio of tax paid divided by total income.
The tax paid on an income of $180,001 is $54,547 for the first $180,000 plus 45 cents for the additional dollar. The average tax rate is $54,547.45 divided by $180,001 which equals 30.3%. This excludes the Medicare levy and temporary budget repair levy.
The top one per cent of income earners in Australia based on tax data from 2011-12 would pay 39% of their income in tax based on the 2014-15 tax rates, including the two additional levies. This average tax rate is 10% below their marginal rate of tax.
The average tax rate is lower than the marginal tax rate.
Higher income households are defined by Treasury using disposable income, which takes into consideration any taxes paid and any government benefits received (i.e family tax benefit, pensions and Newstart). Household size is also accounted for. Treasury define a single person household with $57,000 in disposable income as higher income. A couple with two children with a disposable income of over $120,000 are defined as a higher income household.
Tax data on individuals is available from the ATO. In the table below we have calculated the average tax paid for a number of different scenarios of what might be considered higher income. The percentage of income tax paid includes the Medicare levy and where applicable the temporary budget repair levy. We have used individual tax data because household’s disposable income is more difficult to obtain.
| Income earners |
Annual Income |
Percentage of income paid in tax |
| Top 20% |
$82,733 |
25% |
| Top 10% |
$110,829 |
28% |
| Top 3% |
$180,000 |
32% |
| Top 1% |
$291,007 |
39% |
The table shows it doesn’t matter what definition you use for higher income, no one is paying half their income in tax.
I’m so glad you’ve published this fact check.
As soon as I heard Hockey say that, I worked out that people with incomes over $180,000 were (at least theoretically) paying 30% tax rate myself – the same way that you have done.
But it’s really handy to have the actual figures you provide here.
PS Do you really think he ‘confused’ the two rates? I don’t see anywhere that he has corrected himself – perhaps I’ve missed it . . .
Thanks for this and your other facts pieces – a great step forward in improving our democracy.
Going by this display of ignorance or deliberate misinformation from the Treasurer it is little wonder the Budget is a mess. Must be heavy going being an adviser in Treasury.
I think Mr Hockey is correct. Page or income tax is part of the tax picture, not the full tax picture. There are over 120 different taxes in Australia. Add on GST, health insurance (which is a tax because if you don’t pay it they increase the Medicare tax burden on you), local taxes, council taxes, land tax, fire servic levy and the list goes on and on. If you are not utilising negative gearing or salary sacrife you pay close to or over half your income in gass of some kind. Australia is over taxed in general at all levels. We may look like we earn a lot, but after all the above, the net cash in pocket before living expenses is not that great. I’m not trying to say earning $20k pea is easy, I just think there is a perception that anyone earning $100k is rich. Nope….
David: Those taxes are not unique to high income earners, low income earners are also subject to GST etc. In fact, low income earners would be paying a higher proportion of their disposable income towards these taxes…
I don’t agree with Joe Hockey’s broader point, but to be fair to him and his original claim, other taxes including GST must be included to make this a useful exercise.
Peter: Lower income earners pay a greater proportion of their income in GST, but pay a lower proportion as income tax. I would like to see some proper analysis before making a judgement.
A treasurer that gets this simple concept so wrong is pretty bloody useless. I’ve understood this concept since I started working full time in my early 20s – and I don’t profess to have any knowledge of economics.
Mr Hockey knows very well that most of Australia’s overtly rich are not salary earners. They are in business and know myriad ways of avoiding tax and accessing the public purse. Quote one: “if I had to pay tax, I’d sack my accountant.”
Thank you Margaret for a needful reality check. Tax avoidanceis a favourite sport of the rich. Its
cost to the rest of us is probably immeasurable in the absence of effective measures to combat it.
A small exanple: among the legal fraternity paying income tax is regarded as optional once one has attained the necessary level of seniority.
Mind you the humble tradie is also a serial offender. I can’t remember tha last time I employed a tradie who didn’t accept cash at a reduced rate.
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“higher income households pay half their income in tax”.
Funny I don’t see anything here where he mentions income tax. If you’re going to misrepresent a statement, you probably shouldn’t include the quote that that shows your misrepresentation.