The Shifting Middle

Can we please stop talking about the budget’s tax cuts as applying to high and middle income earners? I know it’s hard for most of the (personally affluent) commentariat to grasp, but there’s barely anything here for middle income earners.

Here is the annual pre-tax income distribution for adults (aged 18-64 with positive incomes), and the corresponding tax cuts in the budget.

  • Poorest 25%: $6,830 per year ($80 tax cut)
  • Median: $29,890 per year ($312 tax cut)
  • Richest 25%: $49,000 per year ($312 tax cut)
  • Richest 10%: $70,000 per year ($1752 tax cut)
  • Richest 5%: $90,000 per year ($2752 tax cut)
  • Richest 1%: $162,000 per year ($4502 tax cut)

These income figures are from the 2003 HILDA survey, so you might want to add a couple of thousand to them, but the picture will be essentially unchanged today.* In sum, you need to go to the top 10% before you find individuals who are getting thousands rather than hundreds of dollars from this tax package, and into the top 1% before you find the folks who are getting nearly $5000.

I’m hoping that Natsem or the Melbourne Institute can work out what fraction of the tax cuts are going to the richest 10% and to the top 1%.

In case it’s of interest, this is the presentation I did on the budget this morning.

Download BudgetForum2005_Leigh.pdf

* They’re also based on individual incomes, and you could play around with the figures to work out the fraction of families in each group. However, this won’t produce a substantively different result.

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12 Responses to The Shifting Middle

  1. I can recall my Uncle many, many moons ago (probably in early 80s) telling me that the only ones who pay their debts are the middle classes. That is the middle income earners in your graph there. I recall reading that companies at greatest risk of having their debts bought were ones that had about 10m – 150m in revenue, as they tended to sell to larger firms, who were lax on paying for the services rendered. We do business with big firms and it is not unusual for them to draw out the repayment process for over 360 days. That is getting into written off territory.

    The tax system isnt much different, the middle classes pay their debts because they have no other choice. They are not economically powerful enough to get away with dodging debts. Nor are they politically powerful enough to get their way in the party scheme of our representative system. Often the middle classes effect on government is populist welfare (electoral bribes) such as government hand-outs for breeding. Which in itself solicits greater dependancy on government.

    The government is essentially getting fat off the blood of the middle income earners. They are the largest number of income earners and have the worst tax bracket. The 30c in the dollar bracket starts at 21K which is insane given the number of tax payers who come from urban areas and the cost of living in those places. They are making a new class of Australians who are dependant on government, simply because they dont have sufficient independant earning capacity, and part of that is because of the burdensome tax system.

    The government income tax system is predatory in the same way credit card companies and mortgage companies are, they prey on the middle class because they know they can get away with it. The system is unfairly burdensome on the middle income earners. As you have mentioned several times Andrew, here and in your book, it is inequitable. I fully agree.

  2. gringo says:

    I agree 100% — middle income earners getting the least out of the changes in the tax schedule. Especially when you look at it in terms tax cuts as a percentage of tax paid, those at $58 000 get the least. No real surprises there — I agree with Cameron in that they do it because they can.

    Still, it is these people that are getting the least that have reelected this government three times.

  3. Econowit says:

    These figures give a good picture of what is going on.

    I don’t like the term richest being applied to 49k and 70k incomes, in my view they could hardly be described as rich.

  4. Spog says:

    “I’m not an economist, but I know what I like”…so feel free to laugh at any of my non-economist misconceptions from here on.

    You start by using some income distribution figures that puzzle me greatly. If the income support system pays single people a minimum of about $10,000 a year, how do so many have this average (or whatever) of $6,830? They are presumably partnered to people with incomes that push down their payments, or are self employed or newly arrived residents (both groups who often can’t get income support payments). Or they chronically under-report welfare receipt when providing incomes for surveys.

    Second, people on maximum rates of income support effectively get a 100% CPI based tax cut every year. That’s because the tax they would pay through the bracket creep caused by indexing their income support is taken away by also increasing their rebates/tax offsets. This is relevant because to the extent that tax cuts compensate for bracket creep, the very bottom end of the income distrubution should get none at all, with the tax cut rising as this rebate effect wears away as private income increases.

    Last, are all the whinges about more tax cuts going to higher earners really an admission that people don’t really like/understand progressive tax scales? Are flat tax systems preferable?

  5. Andrew Leigh says:

    Mark, thanks for the generous post.

    Econowit, describing those earning in the top 25% as “rich” is certainly more accurate than describing them as the “middle”.

    Spog, you’re right that some of the low-income earners are partnered… which is why I suggested that we might also want to look at this from a family perspective (this is something I’ll do next week, if one of the papers wants to run an oped on this). As to flat tax scales, it’s important to remember that consumption taxes are regressive (Quiggin has done a lot on this), so a somewhat progressive income tax to some extent only balances things up. It also recognises the declining marginal utility of money.

  6. Steve Edney says:

    Thanks for the figures Andrew, I know many people through work who seem to think that any income less than 100k is struggling. I’m always glad to have info correcting that bias.

    On the other hand perhaps high would be better term than “rich”? The term rich confuses wealth with income. I am happy to accept that I, and many people I know are in the top few percent of income, but most of these by virtue of their youth are no where near that in wealth, and generally wouldn’t be considered rich.

  7. Andrew Leigh says:

    Steve, you’re right that rich is an imprecise term to describe high income people. But in practice, the correlation between income and wealth is very high. I guess I use rich because I find “high income” a bit anodyne.

  8. Steve Edney says:

    Andrew,

    This is a bit off topic but seemed as reasonable a place as anywhere to post and you as good as anyone to ask.

    Do these income figures and others you quote come from taxable income amounts and if so is there any attempt to correct for how different people are better poised to minimize their tax exposure say via businesses where cars etc are bought through the business, family members may be paid wages although not really performing the services they are being paid for. This is not to mention cash transactions etc, which obviously aren’t available for us PAYE taxpayers – although some other equivalent methods are.

    In the end I wonder how valid these income figures are, especially near the top end where the incentives to minimize – and the availibility to do so, are greatest. Is this adjusted for, or is it neglible or just assumed so?

  9. Andrew Leigh says:

    Steve, HILDA takes into account tax minimisation, since it considers the different tax rates levied on different types of incomes.

    What HILDA doesn’t, and can’t, take into account is tax avoidance. The problem is that we know very little about tax avoidance in Australia, because the ATO have never conducted a randomised audit. Astounding as it seems, no-one has ever pulled 10,000 taxpayers from the database, audited them, and looked at the extent and correlates of legally paying your tax. Part of the problem is that the US TCMP provoked a strong political backlash, and no-one’s willing to risk the same here.

  10. Steve Edney says:

    Thanks for that Andrew. Given the tendancy for people to associate more with people on broadly similar income bands its always difficult to keep some perspective on this.

    I find the fact that they’ve never tried to estimate tax avoidance by taking a random sample astonishing.

  11. Andrew Leigh says:

    Steve, I agree. I formally proposed it to the relevant department last month, and was shot down.

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