Over at Catallaxy, Sinclair Davidson has mentioned that the government is considering an increase in income tax. Specifically, they have said that they want to increase the Medicare Levy (income tax with another name) from 1.5% up to 2.25%.
But Sinclair misses, along with all the media and public commentators, miss the biggest part of the story.
The proposed reform would mean that all people earning over $22,960 would have their marginal tax rate increased by 0.75%. But … and this is the part not well understood … people earning between $20,934 and $22,960 would have their marginal tax rate increased by 8.5%!
That is a significant increase in the marginal tax rate for people on low-incomes. It should also be noted that if we factor in normal income tax (15%) and loss of welfare benefits (60%), the effective marginal tax rates on somebody earning about $21,000 is about 85%. Poor people need a tax cut, not a tax rise.
The reason for this anomaly is that (contrary to popular perception) the Medicare Levy does not have a flat marginal tax rate. Instead, it is 0% for people earning up to $17,794 and then it is “phased in” at 10% for people up to $20,934, and then there is a marginal tax rate above that of 1.5%.
With the government’s proposed increase to the Medicare Levy, the “phase in” period (ie the 10% tax bracket) will need to be extended to people earning up to $22,960… so that people earning about $22,000 will see their marginal Medicare Levy payment increase from 1.5% up to 10%.
Suffice to say, this is very poor policy.
The sad news is that our tax system is so complex that the media and other commentators have totally missed this massive marginal tax rate increase. If the government directly announced a marginal tax rate increase of 8.5% for some of the poorest people in the country there would be a public outcry. But because they’ve announced it in a way that few people understand, they appear to be getting away with it.