Over the last few years I've done a series of posts looking at how particular households were affected by tax-transfer system decisions coming into effect over a succession of Parliaments. The elections for Parliament 45 brought to an end the period that I loosely attribute to Parliament 44 and so I thought it was worth updating the coverage for the aforementioned households, this time in a single post.I'll be covering the following household types:
- single person aged < 55 years
- single person of age pension age
- single person aged < 55 years, 2 children (ages 8 & 10)
- couple, single income, both aged < 55 years
- couple, single income, both aged < 55 years, one with a disability sufficient to be eligible for disability support pension
A note about the charts and wages growth
These charts are an attempt to compare the treatment of a particular household type under the tax-transfer system in place at the election date for Parliament 44 with the same kind of household at the election date for Parliament 45. Importantly, it's not the same household, it's the same type of household. This is most obvious in the households with children - if they were the same household the children would have aged over the Parliamentary term, whereas in these comparisons the ages of the children are the same at both dates.
All the charts in this post compare disposable incomes for a particular household type against the disposable income of the same type of household at an earlier point in time. To compare like with like I use the same gross income in real terms for both households, ie, inflation (or more specifically, movement in the consumer price index, or CPI) is taken into account.
All the charts in this post compare disposable incomes for a particular household type against the disposable income of the same type of household at an earlier point in time. To compare like with like I use the same gross income in real terms for both households, ie, inflation (or more specifically, movement in the consumer price index, or CPI) is taken into account.
This is particularly relevant for changes that are attributed to so-called bracket creep. Comparing the same real gross private incomes across time means that the earlier values are lower numerically, but have the same value after adjusting for inflation. It also means there's an implicit growth in gross private income that matches the CPI. In the absence of any other changes to the tax-transfer system, this growth generally leads to additional income tax liabilities (or changes to other tax or transfer amounts).
Single person aged <55
Chart 1 is an attempt to give some context to the magnitude of the changes during Parliament 44 by including the results from the previous four Parliaments. Also included is a line showing the combined effect ('overall change') of all five Parliaments. Why five Parliaments? It's tempting to say it's because I'm limiting the coverage to Parliaments that commenced in this century, but the real reason is rather more mundane. Cards on the table: I don't have spreadsheet coverage back that far.
Chart 1
Broadly, the chart shows that for private incomes up to around $26,000 a year, the tax-transfer system provided increases in disposable income over the course of Parliament 44. At incomes above that, it delivered reductions. In spite of this, the overall change line is positive across the entire income range - the reductions under Parliament 44 (and the earlier Parliament 43) have only partly offset the gains under Parliaments 40 to 42. I have already done blog posts on the changes in Parliaments 40 to 43 here and here. So, what did Parliament 44 actually do to produce its results? That's shown in Chart 2.
Chart 2
Here we can see the three main contributors to the result. At incomes below around $26,000 the increase in disposable income is due to Newstart allowance. There are two parts to this increase: one is essentially illusory; the other is a real change.
A second contributor to the illusory increase is CPI lag. Although Newstart rates are adjusted in line with movements in the CPI, the actual increase occurs almost 3 months after the period for which the CPI has been calculated. In an environment where inflation is falling, the CPI change that drives the Newstart rate increase can be more than in the period where the increase is actually paid. In other words, the lag between the CPI calculation period and the date of the Newstart increase can give the impression of an above CPI increase where inflation is falling, and conversely, of a decline in value where inflation is rising.
In the current case, the increase at zero private income is a combination of both these effects - election date timing relative to the Newstart rate adjustment, and lag effects in an environment where the inflation rate was falling.
There is however, a real increase in Newstart at incomes above around $1600. This is due to a relaxation of the Newstart allowance income test which, although legislated by Parliament 43, took effect during Parliament 44.
At incomes above around $26,000, disposable income has fallen over the course of the Parliament. One of the contributors to this is an increase in income tax. Up to an income of $180,000 this is due to bracket creep (discussed earlier). Beyond that point the increase is due to the combined impact of bracket creep and the imposition of the budget repair levy.
Finally, the medicare levy was increased from 1.5% to 2% of taxable income during this Parliament. The effect of this is shown in the green trace. The stalactite-like protrusions in the medicare trace are a result of the freeze to the medicare levy surcharge thresholds.
Single person aged 65+
Chart 3
As with the Newstart allowance single person example, over the course of the five Parliaments shown here, changes to the tax-transfer system have resulted in a net increase in disposable income over the entire income range. This is despite the fact that under Parliament 44, and to a slightly lesser extent Parliament 43, disposable incomes fell over a significant part of the income range. Details for the earlier Parliaments are here and here. Chart 4 below shows the changes for Parliament 44 in more detail.
Chart 4
The increase to age pension shown here is a combination of the illusory CPI timing and lag effect discussed earlier and real wage growth linked increases that occurred early in the Parliamentary term. The amount of the increase declines at incomes a little over $10,000 a year. This is due to a fall in the real value of the special income test threshold applied to earned (ie, wage/salary) income as, unlike the broader pension income test parameters, it is not adjusted for inflation.
On the income tax side, all the change shown, apart from the noticeable budget repair levy induced kink downward from $180,000, is bracket-creep related. The significant bulge at lower incomes, coinciding with the pension trace, illustrates that bracket creep affects more than just income tax - in this case there is the added impact of creep related income growth on the senior Australians and pensioners tax offset, the parameters for which were not adjusted during the period.
The medicare levy changes reflect the increase in the levy from 1.5% to 2%.
Single person aged <55, 2 children (8, 10)
Chart 5
As with the single person example, the treatment of this household type under Parliament 44 (the pale blue trace) is in two distinct sections. At incomes below $40,000 there appears to have been an increase in disposable income; above that point disposable income has fallen. Interestingly, the reduction under Parliament 44 over the income range from roughly $104,000 to $117,000 has been large enough to offset the gains under the previous four Parliaments combined. Households in that range actually have less disposable income in real terms that their equivalents did at the start of Parliament 40 back in 2001.
More information about the changes underlying the results for Parliaments 40 to 43 can be found here and here. For Parliament 44, lets move to Chart 6.
Chart 6
The increases in Newstart allowance arise for the same reasons as discussed earlier. The same CPI timing mechanism underpins the apparent increase in Family Tax Benefit Part A (FTB A). The reduction in FTB A starting at around $100,000 reflects a continuation of the freeze on indexation of the income test threshold at this point.
The changes in medicare levy and income tax are as described earlier.
The big change, and one of the main factors driving the loss over 5 Parliaments mentioned above, is the removal of eligibility for Family Tax Benefit Part B (FTB B) at incomes over $100,000 (down from the $150,000 limit imposed in earlier Parliaments). The $100,000 limit seems to have become something of a favorite, as entitlement to the schoolkids bonus was also cut from those with incomes above that threshold.
Couple, single income, both <55 years
Chart 7
This is the second household type where tax-transfer changes over the five Parliaments have resulted in a disposable income on July 1 2016 that is lower in real terms than it was for equivalent households in 2001. This occurs in the approximate income range $50,000 to $85,000 and is almost entirely attributable to Parliament 43's abolition of the dependent spouse tax offset. Details of this and decisions of earlier Parliaments are here and here. Chart 8 looks at what Parliament 44 did.
Chart 8
This household reflects the basic pattern for Parliament 44:
- increased disposable income where income support is paid (in this case, Newstart allowance), attributable to CPI timing issues and a relaxation in the income test
- increased income tax due to bracket creep and the budget repair levy
- an increase in the medicare levy. Again, the green 'stalactite' is a result of the freeze in the medicare levy surcharge thresholds.
One small item appears here which has not featured in the earlier charts - the low income supplement. It was introduced as part of the carbon pricing compensation measures during Parliament 43 and was intended to assist households who may not have been adequately compensated through either the transfer system or through tax cuts. The income eligibility thresholds were not indexed and so it's availability has declined via a version of bracket creep. Under current legislation the scheme will be abolished from 1 July 2017.
This chart shows the by now familiar pattern of apparent and real gains at low incomes, with reductions occurring from a little under $50,000. This is another household type where over some of the income range (in this case a relatively small one) incomes have fallen to below those in place at the election date for Parliament 40. In large part this is due to the abolition of the dependent spouse tax offset under Parliament 43. (For more detail on the decisions taken in the earlier Parliaments see this post).
The following chart shows the changes under Parliament 44.
Eligibility for DSP also brings with it an entitlement for the partner - access to the invalid and carer's tax offset, which replaced the former dependent spouse tax offset. This shows in the chart as the gain in disposable income as a result of changes in P2 (partner 2 - the working partner) tax liability.
Couple, single income, one Newstart allowance, one disability support pension, where relevant, both under 55 years old
Chart 9
This chart shows the by now familiar pattern of apparent and real gains at low incomes, with reductions occurring from a little under $50,000. This is another household type where over some of the income range (in this case a relatively small one) incomes have fallen to below those in place at the election date for Parliament 40. In large part this is due to the abolition of the dependent spouse tax offset under Parliament 43. (For more detail on the decisions taken in the earlier Parliaments see this post).
The following chart shows the changes under Parliament 44.
Chart 10
The changes in this chart, bar one, are due to the factors already described: apparent and real income support increases at low incomes, bracket creep and an increase in the medicare levy. The exception is the spike at around $75,000 which probably does need some explanation.
There are two aspects to this significant gain in income, both related to access to the disability support pension (DSP). First, as with the age pension discussion at Chart 4, there was a real increase in DSP due to the link to wages growth. The portion of the spike that is DSP simply reflects an increase in the cutout point for the pension under the income test as a result of that higher starting rate of pension. Newly eligible households in this extended income range for DSP payment become entitled to a minimum amount (at 1 July 2016 this was $49 a fortnight - a combination of the pension and energy supplements).
Updates
My posts to this blog are somewhat infrequent. However, I do regularly use Twitter to post updated charts. Should you wish to, you can follow me there - I'm @dplunky
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