How much income tax do we really pay? An analysis of 2011–12 individual income tax data

Abstract

This paper investigates the extent to which certain deductions and tax offsets in the individual tax system are used by tax payers across different income ranges, and the impact these have on potential tax revenue and the equity of this system. Executive summary Personal income tax is the largest component of tax revenue. Hence any conversation about tax reform should consider the personal income tax system. The individual tax system is designed to be progressive, with increasing marginal tax rates at higher income levels. This contrasts with indirect taxes which are generally flat or slightly regressive in their effect. This analysis uses 2011–12 tax return data on 12,736,030 tax filers to investigate the use of deductions and offsets across income levels. This data provides information at a detailed level of income grouping, including for those with incomes over $1 million in the income year. Wages and salaries formed the bulk of income for most taxpayers except at the lowest and highest income levels. For low income groups, pensions and allowances are also significant, while for very high income earners, income from investments is the major source. However, all income sources were recorded at all income levels, with some low income earners reporting income from partnerships and trusts and investments including rental housing, while a limited number of high income individuals reported income from pensions and allowances. The largest category of deduction recorded in tax return data related to rental deductions. Deductions were larger than income on average for rental properties across all income groups. The highest percentage losses were among those with incomes (net of their rental loss) between$55,001 and $80,000 with deductions exceeding income by more than 28 In general, the value of deductions claimed increased with income. However, for some deductions related to specific forms of earnings, deductions as a proportion of these earnings declined as income increased. The low income tax offset is the largest value tax offset in the individual tax system, and, not surprisingly, low income groups were the main beneficiaries. The second largest value tax offset is the termination payment offset. This offset was of very little value to low and medium income groups, but was of significant value on average to high income earners. For those who claimed this offset and had an income lower than$150,000, it was worth less than $4,000 on average, whereas for those with incomes over$500,001, this offset was worth an average of over $45,000. Despite a greater average value of deductions and offsets to high income earners, overall the progressive nature of the Australian individual income tax system is not significantly reduced