• Last Updated: 7th May 2018

Budget Impact on Population:

Disposable income components and average effective tax rates: A comparison by income, 2016-2017 vs. 2001-2002

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 an 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 along with changes in private income in two financial years: 2016-2017 and 2001-2002. 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 reliefs (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 the disposable family income. Note that families is used here as a colloquial term for income units and a dependent child is defined as being less than 16 years of age or a dependent student bertween 16 and 24 years.

In addition, the analysis also looks at changes in disposable income as well as its components along with private income when the 2001-2002 policy is assumed to be 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 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 is the same in the current year as it was in 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 two surveys, in 2001 and 2016.

IV. Findings

Figures 4.1.a and b below describe changes to disposable income components and AETR (%) along with changes in private income in 2001-2002 and 2016-2017.

Details are shown in the Appendix.

Figures 4.2.a and b illustrate changes in components (both AUD and proportion of disposable income) if the 2001 policy is applied to the financial year 2016-2017.

Appendix

Table A: Changes to disposable income components and AETR (%) by income decile in the financial year 2016-2017

Component 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Total income -1.92 5.59 43.65 77.42 96.37 105.81 113.13 118.82 125.42 131.74
- Wage 0.72 1.65 24.17 55.28 76.02 86.30 92.42 100.71 110.32 90.22
- Investment income -0.12 2.20 6.69 5.21 4.17 4.46 4.90 5.22 4.91 11.75
- Business income -2.55 0.08 1.37 4.35 4.76 4.96 6.24 5.10 5.35 7.96
- Superannuation income 0.00 0.39 7.42 8.53 8.65 7.95 7.82 5.66 2.85 2.87
- Other income 0.03 0.76 2.57 3.29 3.04 3.04 2.62 3.23 3.24 19.98
- (excl.) Superannuation sacrifice 0.00 0.00 0.04 0.19 0.48 1.00 0.93 1.12 1.29 1.05
(-) Total tax 0.36 0.55 1.27 5.43 11.06 16.07 19.07 22.57 27.22 32.85
- Income tax 0.34 0.53 1.22 4.71 9.76 14.31 17.04 20.44 24.90 30.65
- Medicare levy 0.02 0.02 0.04 0.70 1.28 1.68 1.89 2.04 2.24 2.07
(+) Total tax offset 0.18 0.37 1.00 1.32 0.96 0.54 0.46 0.35 0.22 0.08
(+) Total benefit 102.10 94.59 56.63 26.69 13.73 9.71 5.48 3.39 1.58 1.03
- Age pension 47.69 43.73 31.98 9.08 4.27 1.62 0.81 0.39 0.05 0.08
- Carer payment/allowance 8.93 8.52 3.27 1.55 0.80 0.23 0.13 0.07 0.06 0.03
- DSP 27.29 11.29 4.26 0.98 0.39 0.10 0.09 0.05 0.01 0.01
- Newstart allowance 6.36 3.98 2.96 1.07 0.15 0.08 0.01 0.03 0.01 0.02
- Parenting payment (single) 0.00 8.40 1.93 1.31 0.27 0.02 0.00 0.00 0.00 0.01
- Veteran pension 1.78 2.22 0.94 2.04 0.14 0.10 0.13 0.03 0.13 0.02
- Youth allowance 1.92 1.94 2.54 1.14 0.30 0.37 0.13 0.03 0.01 0.00
- FTB part A 3.40 8.20 3.98 5.14 4.46 4.39 2.37 1.15 0.13 0.05
- FTB part B 1.05 2.57 1.15 1.38 1.16 1.32 0.69 0.38 0.04 0.01
- Child care benefit 0.21 1.04 0.46 0.91 0.74 0.88 0.66 0.82 0.73 0.57
- Private health insurance rebate 0.57 0.69 0.82 0.61 0.46 0.40 0.44 0.41 0.41 0.21
(=) Disposable income 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
Average effective tax rate 0.00 0.00 0.00 0.00 0.00 5.49 11.61 15.84 20.27 24.09

Table B: Changes to disposable income components and AETR (%) by income decile in the financial year 2001-2002

Component 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Total income -6.94 4.11 33.62 74.87 96.00 109.00 115.79 121.59 126.73 142.11
- Wage 2.72 1.35 15.58 50.82 72.71 89.92 98.32 104.87 109.58 115.71
- Investment income -0.48 2.22 9.17 6.26 5.29 4.66 5.52 5.08 5.79 11.82
- Business income -9.10 -0.14 0.54 3.20 6.35 5.99 6.28 7.95 8.00 11.06
- Superannuation income 0.00 0.12 3.20 8.10 7.69 6.06 4.30 2.65 2.86 1.65
- Other income 0.00 0.39 3.38 5.49 3.94 2.48 2.34 2.06 1.54 3.57
- (excl.) Superannuation sacrifice 0.08 0.00 0.37 0.05 0.48 0.38 1.10 1.09 1.17 1.72
(-) Total tax 3.32 3.56 4.57 7.91 13.22 18.98 22.13 25.65 29.25 42.87
- Income tax 3.32 3.55 4.48 7.30 11.87 17.09 20.13 23.43 26.90 40.31
- Medicare levy 0.01 0.01 0.01 0.28 0.83 1.33 1.54 1.65 1.74 1.96
(+) Total tax offset 2.94 2.84 3.19 2.44 1.44 0.91 0.66 0.47 0.28 0.09
- SAPTO 1.77 1.76 1.94 1.15 0.43 0.16 0.10 0.05 0.01 0.00
(+) Total benefit 107.32 96.61 67.75 30.59 15.78 9.06 5.68 3.59 2.23 0.67
- Age pension 50.32 34.62 28.35 10.04 3.52 1.38 0.73 0.16 0.07 0.00
- Carer payment/allowance 4.77 1.75 1.15 0.56 0.15 0.08 0.05 0.07 0.02 0.02
- DSP 21.66 6.76 2.73 0.96 0.56 0.16 0.10 0.00 0.00 0.01
- Newstart allowance 2.62 8.23 3.73 1.38 0.29 0.05 0.00 0.02 0.00 0.01
- Parenting payment (partnered) 3.52 2.51 2.93 2.34 1.18 0.18 0.02 0.03 0.01 0.01
- Parenting payment (single) 1.33 15.45 6.54 2.74 0.87 0.04 0.00 0.00 0.00 0.00
- Veteran pension 5.18 5.91 2.72 1.11 0.60 0.29 0.28 0.07 0.14 0.10
- Youth allowance 3.49 2.20 4.87 2.14 0.80 0.37 0.14 0.07 0.01 0.00
- FTB part A 5.35 11.08 7.90 5.34 4.92 4.05 2.44 1.77 1.17 0.07
- FTB part B 0.92 3.47 1.83 1.19 1.26 1.22 0.98 0.70 0.33 0.17
- Child care benefit 0.34 1.23 1.27 0.98 0.78 0.81 0.56 0.34 0.14 0.05
(=) Disposable income 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
Average effective tax rate 0.00 0.00 0.00 0.00 0.00 8.26 13.64 17.76 21.09 29.63