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Tax Threshold Timewarp

Another battle of tax policies hits as the election draws nigh. Mind games are being played on the media and electorate around a once simple concept of a 'Tax free threshold' for taxable income. While hard working families are being told their marginal tax rates are 15% and 30%, they will actually be 19% and 34% between incomes of $25,000 and $55,000 in 2008/09 because of the progressive withdrawal of the Low Income Tax Offset(LITO) of $1,200pa from $25,000pa incomes onwards.

A long time ago in a government galaxy far away in the 1970's, an Australian government thought it would make sense to line up the tax free threshold(TFT) with age pension and unemployment benefit. That makes sense - these are subsistence income levels and it makes sense people should earn these amounts before paying tax. In 1977 the TFT was close to this goal at $2,260pa. In the 30 years since 1977, wages have increased by 6.1%pa and age pension has increased by 5.9%pa - let's split the difference and say 6%pa. So if TFT of $2,260 had been increased every year it should now be $12,980. But it's only $6,000 and has not been increased since 2001!

So why do we have this charade? Well it 'costs' a lot more and makes nowhere near as good media to ugrade the TFT threshold for all tax payers than to have a a LITO and tell everyone their headline marginal rates are lower than they really are. Tax is simple when you don't know what's really going on. These are the same reasons we have never had indexation of all tax income bands which lasted more than a year or two.

Posted Sunday, 21 October 2007

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