• Last Updated: 7th May 2018

Budget Impact on Population: Disposable income components and average effective tax rates over time from 2001 to 2016

I. Introduction

A tax-benefit system assessment, followed by reform proposals basically requires knowledge about total disposable income that a family should get after paying tax and receiving benefits. It is followed by a useful measure in assessing the size of benefits transferred to and from the government given the income level and family type at a specific point of time, so-called Average effective tax rate (AETR). This rate is measured as a proportion of net payments to the income on which they are levied. Measuring this effective tax rate has been applied in various studies estimating the impact of tax burdens on different population groups. In this report, we focus on to what extent the components of disposable income and AETR change over time from 2001 to 2016. This analysis consists of four sections: Introduction, Methodology, Data, and Findings.

II. Methodology

The Average Effective Tax Rate (AETR) can be measured as:

$$AETR_t^i = \frac{T_t^i}{Y_t^i}$$

where T - tax burden after receiving benefits, Y - private family income, t - year, i - family type. This rate summarises information about not only the tax rate structure (progressive or proportional) and possible tax relief (on the tax rate or tax burden) but also the benefit rate structure.

AETR is measured at the family levels, using our STINMOD+ model to calculate disposable family income. Note that families is used here as a colloquial term for income units and a dependent child is defined as the one aged less than 16 years or a dependent student aged between 16 and 24 years.

In addition, the analysis also looks at changes in disposable income as well as its components if different policies in different years are applied to the financial year 2016-2017.

While this methodology is expected to maximise the disposable family income of each household using the optimization principles, the model has some limitations which result from the complication of the model in both theory and practice. First, in the real world, income tests and means-tests are sometimes applied to the person who decides to claim the benefit instead of the person who should apply to optimise their disposable family income. Second, in a few cases, these tests are based on the individual or family private income received during the preceding financial year. STINMOD+ assumes the amount of income was the same in the current year and the previous year. Overall it must be stressed that, while the model is notably sophisticated, the results are nonetheless only estimates and do have limitations.

III. Data

This analysis uses The Household, Income and Labour Dynamics in Australia (HILDA dataset). HILDA is a longitudinal survey conducted annually from 2001 to 2016 and collects information about economic and personal well-being, labour market dynamics and family life. The HILDA survey includes more than 17,000 Australians each year. In this analysis, we use all surveys, from 2001 to 2016.

IV. Findings

Figure 4.1 below describe changes to disposable income components and AETR (%) over the period 2001-2016.

Details are shown in the Appendix.

Figure 4.2 illustrates changes in benefit components if different policies in different years are applied to the financial year 2016-2017.

Appendix

Table A: Changes to disposable income components and AETR (%) by income decile over the period 2001-2016

Component 2002 2004 2006 2008 2010 2012 2014 2016
Total income 109.77 109.42 108.54 107.62 106.73 107.03 108.20 108.84
- Wage 86.40 86.98 83.77 85.27 86.19 84.75 84.34 84.30
- Investment income 6.36 7.47 8.97 8.34 6.85 7.15 7.53 6.81
- Business income 6.76 6.93 6.07 5.08 5.70 5.78 5.79 5.55
- Superannuation income 3.30 3.47 3.57 4.09 3.51 3.81 4.90 4.83
- Other income 7.60 5.25 6.77 5.45 5.27 6.41 6.28 8.09
- (excl.) Superannuation sacrifice 1.00 0.89 0.84 0.80 0.95 1.02 0.78 0.90
(-) Total tax 24.77 24.87 21.97 21.31 21.54 20.20 21.93 21.85
- Income tax 22.92 23.01 20.46 19.87 20.11 18.77 20.05 20.04
- Medicare levy 1.33 1.35 1.30 1.32 1.32 1.30 1.74 1.72
(+) Total tax offset 0.80 0.97 1.04 1.83 2.13 0.63 0.40 0.38
(+) Total benefit 14.20 14.48 12.40 11.85 12.68 12.54 13.33 12.63
- Age pension 4.76 4.75 4.11 3.96 4.63 4.62 4.97 4.95
- Carer payment/allowance 0.33 0.44 0.44 0.44 0.69 0.76 0.83 0.83
- DSP 1.16 1.24 1.21 1.18 1.47 1.45 1.53 1.43
- Parenting payment (single) 1.13 1.05 0.43 0.46 0.40 0.38 0.43 0.40
- FTB part A 2.43 2.77 2.43 2.22 2.05 1.85 2.00 1.85
- FTB part B 0.74 0.82 0.78 0.70 0.65 0.64 0.65 0.54
- Child care benefit 0.47 0.42 0.34 0.66 0.65 0.63 0.67 0.69
(=) Disposable income 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
Average effective tax rate 8.90 8.61 7.86 7.08 6.30 6.57 7.58 8.12