Analysis of the 2005 Tax Cuts

Since no-one else seemed to be doing it, I’ve analysed the 2005 tax cuts by household. Since inequality and poverty analysis is typically done at a household level, it is more informative to see how the benefits are distributed across households than across individuals. The main findings are:

  • The share of the tax cuts going to the richest 1% of households will be 3% in 2005-06 and 4% in 2006-07.
  • A greater share of the 2006-07 tax cuts will go to the richest 5% (19%) than to the poorest 50% (11%).
  • Middle-income taxpayers get substantially less than an even share of the tax cuts.

To download the analysis (4 page PDF file), click here.

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4 Responses to Analysis of the 2005 Tax Cuts

  1. Spog says:

    Well, it’s called Imagining Australia, so imagine this…

    We get a new tax system in which the bottom 50% of the income distribution pays no tax at all. Much rejoicing. Then we get tax cuts, and amazingly, no-one in the bottom 50% gets any. The tax cuts are quite obviously skewed toward the top end of town. Much irritation and bleating.

    I guess though, people might eventually twig that to get a tax cut, you have to pay tax.

    Enough of the flippancy.

    Andrew, can you explain how the bottom 50% can have tax cuts at all in the second year, given that the 15% scale comes in for 2005-06, and all the other cuts are high end incomes? The middle 20% doesn’t have an average income high enough to get tax cuts either, but those I can accept because it’s an average, so there must be some at the 30%/42% margin. That doesn’t seem to be the case for the bottom group though.

    Also, and back to my flippant point, I’d make a comment that I made earlier, that for single people, it’s almost impossible not to have a tax free threshold in excess of $10,000 a year. Couples are much more complex, but even there, at a household level they generally have a minimum tax free threshold of over $18,000. Given this, just how much tax cut would one expect to see going to the bottom end?

  2. Andrew Leigh says:

    Spog, I’ve taken a shot at answering your criticism in a new blog entry today. As to the bottom $10,000 group getting something in 2006-07, the simple explanation is that the 2006-07 tax cuts are a comparison with the 2004-05 tax laws, not the 2005-06 tax laws. Sorry – I should’ve made this clearer.

  3. rossco says:

    I have a problem with using household income for tax analysis purposes. We are taxed as individuals not as households. I have an income of $50 000+, my wife has income of $20000+ so we both get a $6 cut even though our household income is close to $80000. If we were taxed on household income we would get a much bigger cut (around double I think)

  4. Andrew Leigh says:

    Rossco, this was precisely the rationale for my analysis. The microdata I have includes information on both individual incomes and household incomes. So I can see how the tax cut affects each individual, and then aggregate that up to a household level.

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