A distributional analysis of the Coalition and ALP tax proposals

Since no-one else seems to be doing it, I’ve been tinkering with the Coalition and ALP tax proposals, trying to look at how they’re distributed across the income spectrum. Here’s my best estimate as to their distribution across the 10 family income deciles.

Family income decile
Coalition proposal
ALP proposal (excl education credit)
ALP proposal (incl education credit)
Bottom 0.2% 0.3% 0.4%
2 3.2% 3.3% 3.3%
3 3.5% 3.6% 3.8%
4 7.1% 7.4% 7.4%
5 9.8% 10.1% 10.2%
6 9.5% 9.9% 10.1%
7 9.7% 10.0% 10.2%
8 12.5% 13.0% 13.1%
9 15.8% 16.4% 16.3%
Top 28.3% 25.5% 24.8%
Total
100%
100%
100%

I’ve also done the same analysis by percentile. I won’t bother to show all 100 groups, but here’s the richest 10 percent.

Family income percentile
Coalition proposal
ALP proposal (excl education credit)
ALP proposal (incl education credit)
90 1.7% 1.8% 1.8%
91 1.5% 1.6% 1.6%
92 1.7% 1.8% 1.8%
93 1.8% 1.9% 1.9%
94 2.1% 2.2% 2.1%
95 2.4% 2.5% 2.4%
96 2.2% 2.3% 2.2%
97 2.3% 2.4% 2.3%
98 3.3% 3.2% 3.1%
99 3.7% 3.2% 3.2%
Top 7.1% 4.4% 4.3%

Here are some things that I learned from this exercise:

  • The action is really at the top. The only difference between the Howard and Rudd tax cuts is that Rudd wouldn’t cut tax rates from 45% to 42% for those earning over $180,000. Assuming the same rate of wage growth that we’ve had over past years, only 1.4% of adults in 2010-11 will have an income in that range, while only 3% of families will have an income-earner in that range.
  • This means that the richest 1% of families get 7% of the Howard tax cuts, but only 4% of the Rudd tax cuts. The richest 10% get 28% of the Howard tax cuts, but 25% of the Rudd tax cuts.
  • The education credit is fairly evenly distributed across the income spectrum (as Labor pointed out on Friday, 2/3rds of families with children are eligible for it). So the Rudd package looks more even – but only a little – if you take account of it.

Boring methodological details over the fold.

  • The ALP tax proposal is here. The Coalition tax proposal is here. 
  • The analysis is for 2010-11. I use microdata from the 2005-06 wave of the HILDA survey, with incomes indexed by 4% per year (same rate as Treasury has been using for wage growth in recent budget papers).
  • The analysis compares current tax scales (those applying in 2007-08) with the tax scales that both parties propose for 2010-11.
  • It takes account of the low-income tax offset, but not the senior Australians tax offset.
  • It is based on family income. Things look more unequal if you only look at individuals.
  • Incomes are not adjusted to account for economies of scale in larger families.
  • The analysis does not take account of the possibility that incomes may respond to the tax changes. This would probably make the distribution look more unequal (though it would also have efficiency implications).
  • The analysis assumes that all families claim the full amount of the education tax credit, and takes account of the fact that the credit is refundable (ie. those who pay no tax get it as a transfer payment).

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14 Responses to A distributional analysis of the Coalition and ALP tax proposals

  1. Peter Wood says:

    These figures suggest that the top 10% will get $9.6 billion under the Coalition proposal and $7.7 billion under the Labor proposal. I can think of many better ways of spernding this money – for example closing gaps in Aboriginal health and education; resoucing hospitals properly; research, development, demonstration and deployment of renewable technologies; increasing the amount of ARC grants; proper public transport infrastructure; reducing greenhouse gas emissions from land use change by funding revegetation and avoiding deforestation and land clearing.

    One of the reasons that the federal government has had large surpluses lately is they have been sqeezing funding for the states, which has resulted in inadequate health services, public transport infrastructure, etc. The opportunity cost of these tax cut proposals is huge.

  2. Labor Outsider says:

    Andrew – sorry to bang on about this but I think it would also be useful to repeat your analsyis, but this time scaling by income. From a distributional perspective it is at least as interesting to analyse the proportional effect on disposable incomes throughout the distribution. I suspect that if the analysis were done in that way the cuts would look less skewed to the top of the distribution….

  3. Sinclair Davidson says:

    I’m wondering what the distribution of families with children is over the income range. Your results seem to be showing education credit effects in the top 10 percent. Would they be eligible for FTB-A?

    The real benefit of the ALP plan is that the price of second-hand, one-year old lap-tops is going to fall.

  4. Kevin Cox says:

    Andrew please do not do as Labor Outsider suggests as it simply perpetuates existing income distribution patterns and makes those who are taking more of the pie feel better. Keep up the analysis in absolute amounts.

    By the way I feel left out in all these calculations as all my income goes into superannuation and I take out what I need when I need it. This gives an effective tax rate of 15% – actually less than that because I do not pay any tax because it is all covered by franked dividends.

    Now I accept all this money but it is definitely not “fair”. Why should I get a salary of $105K and pay no tax when I could afford it simply because I am old and have been able to accumulate a few assets and am able to “work the system”?

  5. Andrew Leigh says:

    LO, the figures you want are in the Liberal Party press release. My type of analysis would normally be in that document too (it was in the Treasury budget papers for the 2005 & 2006 cuts), but it was omitted from the policy documents this time. As KC notes, framing is a political exercise.

    Sinc, I do have a few people in the top decile getting FTB-A (some of these will be big families, who can be quite rich and still get FTB-A). Also, don’t forget that the share figures have to add to 100%. So as soon as you scrap the tax break for those earning >$180,000, the shares of almost everyone but the top 3% of families increase.

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  7. Labor Outsider says:

    Andrew – I think it is a little hard to argue that the treasury documents frame the cuts politically – when they show clearly that higher income earners receive larger absolute tax cuts.

    Kevin – you are missing my point. If the proportional gain in disposable income following a change in taxes is greater in the lower part if the income distribution is greater than at the top part of the distribution then the change makes the system MORE not LESS progressive – REGARDLESS of whether the absolute tax reduction is greater at the top of the distribution.

    Now, if you want to argue that the tax changes are not progressive enough – then that is a different story. In my view the distribution of disposable income is more unequal than it should be in Australia – as is access to high quality health and education. I am sure you would agree.

  8. Jono says:

    This is only half the analysis. Why would we be interested in seeing which groups gain more from the proposed tax cuts, without knowing what they are already contributing at present ?

    You are assuming the status quo contributions of each group is fair and just, and using that as a reference point.

    Why do you intentionally omit the current contribution figures ? The highest income earners pay an overwhelming contribution towards tax revenues at present.

  9. spog says:

    Andrew,

    I must have missed something – how do you get any difference at all between the Labor and Coalition tax cuts for lower incomes if you disregard the education thing? They look identical to me. Things only seem to change from $180,000 because of Labor’s decision to defer this cut to the aspirational stage.

  10. Andrew Leigh says:

    LO, I didn’t mean to imply that the Treasury documents are politically framed. The point I was making is that typical tax cut graphs from Treasury show the tax cuts both as a % of income, and in dollar terms. By contrast, the Liberal Party press release showed only the former. It’s pretty self-evident why they did this, given how much of the cuts go to the top end.

    Spog, in dollar terms, you’re right – but don’t forget that the share figures have to add to 100%. So as soon as you scrap the tax break for those earning >$180,000, the shares of almost everyone but the top 3% of families increase.

  11. Kevin Cox says:

    LO I am arguing for a flatter distribution of total income.

    Perceptions and “understanding” in the community – not the rights or wrongs of the way to measure things is important to achieve change. How numbers are presented is very political – for example:

    Assuming these invented figures are correct we could say the top 1% get a tax cut of 10% and the bottom 1% get a tax cut of 100% rather than. The average person in the top 1% received a tax cut of $1000 a week and the bottom 1% of tax payers received $10 a week.

    These tell the same “facts” but they give a different political message. Percentages entrench skewness of distribution and it is my gut feeling (not backed by any facts) that the more skewed the less livable the society for the average on just about any measure. I am sure someone can point me to somewhere to both refute this belief and to support it:)

  12. spog says:

    Thanks Andrew. When I read your answer I had one of those “D’oh” moments.

  13. backroom girl says:

    I still don’t really get the logic of this kind of analysis. I would have thought it self-evident that people who pay more tax have more capacity to benefit from tax cuts. Especially if the tax cut has anything to do with cutting rates of tax or moving the thresholds where those tax rates cut in.

    Now, I understand that you can have a tax cut that is essentially flat across the income distribution – for example, a simple increase in the tax threshold and nothing else. Is this the only kind of tax cut you would favour, Andrew? (I actually think it would be a good idea, by the way – rather than endlessly tinkering with the Low Income Tax Offset, which just reaffirms our apparent mania for income-testing absolutely everything.)

    But even under that kind of tax cut, people just above the old threshold would get less of a tax cut than people with income at the new threshold. Would that make it regressive?

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