Tax progressivity in Australia: Facts, measurements and estimates

Vol: 
5/2019
Author name: 
Tran, C
Zakariyya, N
Year: 
2019
Month: 
March
Abstract: 

We study the progressivity of Australia’s personal income tax system after the introduction of a New Tax System (Goods and Services Tax) Act 1999. We use two data sets: administrative data from Australian Tax Office (ATO) 2004-16 and survey data from the Household Income and Labour Dynamics in Australia (HILDA) survey 2001-16. We first document the distributions of income and tax liabilities, properties of the joint distributions of taxes paid and income, and discuss how taxes are varied across households and over time. We next provide estimates of tax progressivity using two approaches: one based on tax liability progression and one based on tax liability distribution relative to income distribution. The result obtained from the tax progression approach implies a significant decline in the average level of tax progressivity since 2004. Meanwhile, the result obtained from the tax distribution approach indicates a tax progressivity cycle with a modest decline up to 2006, then a sharp increase until 2010, and a slight decline thereafter. The personal income tax cuts for all taxpayers in early 2000s and the introduction of tax offset for low income earners (LITO) are main driving forces. Moreover, the evolution of income distribution and its interactions with bracket creep strongly affect the overall progressivity level of Australia’s income tax system. Hence, our findings provide new insights into the dynamics of income growth and tax progressivity, which has implications for tax policy debates in Australia.

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