WA residents earn higher incomes than those in other states, on average.

Tax relief flows west

Friday, 22 June, 2018 - 14:37

A greater proportion of Western Australian taxpayers are likely to benefit from immediate changes to tax thresholds passed through parliament yesterday than other states, according to Business News analysis of Australian Taxation Office data.

Two parts of the package apply to the 2019 financial year- increased low income tax offsets, and a shift in the entry threshold for the 37 per cent tax bracket from $87,000 to $90,000.

That change will provide a benefit of about $135 per annum.

Using the most recent information from the ATO, which covers the 2016 financial year, about 342,000 WA residents with taxable incomes earn above that $87,000 threshold.

About 20,500 residents had taxable incomes between $87,000 and $90,000.

With about 1.1 million individuals having taxable status in the year, it means around 30.1 per cent of WA taxpayers will be above the $87,000 mark and will benefit from the change.

Only the Australian Capital Territory has a higher portion of taxpayers above the $87,000 mark, at 33.6 per cent, while the Northern Territory is around 28.5 per cent.

At the other end of the spectrum is Tasmania, where 15.8 per cent of taxpayers register incomes above $87,000.

However, median income earners in both states will have the same level of benefit in the upcoming financial year, at $530 a year.

WA's median income, which means the income level in the middle of all income levels, is around $52,500.

For people at that level, the saving is derived from the changes to the low income offset, rather than altering brackets.

In the longer term, the biggest change is the abolition of the 37 per cent bracket altogether, creating a flat 32.5 cent marginal rate on earnings between $40,001 and $200,000.

That is part of the way towards a recommendation by the 2010 Henry Review of taxation commissioned by the former Labor federal government.

“A high tax-free threshold with a constant marginal rate for most people should be introduced to provide greater transparency and simplicity,” the review said.

But it also called for the removal of tax offsets, suggesting they be incorporated into the tax scale in itself.

The Rethink tax discussion paper, commissioned by former treasurer Joe Hockey and released in 2015, gave more detail.

“Compared to taxes with a relatively significant impact on economic growth and living standards (such as company tax), individual income tax is usually considered to have a comparatively moderate impact on the behaviour of most people, and relatively minor adverse impacts on economic growth and living standards,” that paper said.

Probably one of the most notable economic works on flat tax was in the 1980s, by economist Robert Hall and political scientist Alvin Rabushka.

They argued for a form of flat tax, saying it would improve incentives for work, capital formation and entrepreneurship.

The biggest responses were from married women, according to Mr Hall and Mr Rabushka, who often face higher marginal tax rates if their husband is working full time as incomes are filed jointly.

Additional pressures for married women reentering the labour force after taking time off to have children will include tapering off of welfare payments as income increases, and childcare costs.

In combination, they can make the effective marginal tax rate of reentering the workforce high and create a disincentive.