Tax progressivity in Australia: Facts, Measurements and Estimates

Project stage: Completed

This is an empirical examination of trends in the progressivity and redistributive effect of income tax in Australia since the introduction of A New Tax System (Goods and Services Tax) Act 1999. We employ two methodological approaches: one based on tax liability progression and one based on tax liability distribution, and estimate trends in income tax statistics between 2000 and 2018 using administrative tax data from the ATO and panel data from HILDA.

Key findings:

Between 2000 and 2018, income tax in Australia went through cycles of lesser and greater progressivity.

We identify two main drivers of the tax progressivity cycle: lack of automatic indexation and mismatch between the income tax code and the evolution of market income distribution. Active tax policy with frequent adjustments to income brackets, marginal rates and offset levels drive the progressivity level before 2010. Meanwhile, inactive tax policy induces lower levels of tax progressivity after 2010 as the income tax code fails to track the changes in market income distribution. Indexation to inflation can partially mitigate the decline in progressivity; however, it is not a full substitute for a proper tax indexation system with (annual) frequent adjustments.

Note: The blue line (circle markers) is the Suits index for the 2001 income tax system with no adjustments to income tax brackets since 2001. The red line (square markers) is the Suits index for a hypothetical tax system where income tax thresholds are indexed to the CPI. The black line (triangle markers) plots trends for the tax system where thresholds are indexed to average growth in nominal pre-government income. The dashed green line is the one for the actual tax system with no indexation. The income distribution is the actual one from our HILDA sample from 2001 to 2016.