Australia Social Security Tax and Benefit SystemAugust 3, 2022
Imagine that a government provides subsidies to single parents that actually increase tax rates on additional work. This is the case for an Australian single parent who earns less than the average wage. With an increase in pay of just AUD 983 more, he would face a 652 percent marginal tax rate. Therefore, despite the pay increase, this worker will face a net loss and see his earnings cut by AUD 5,428. An Australian parent who benefits from a government program worth AUD 21,000 might lose 100 percent of that benefit if he or she earns above the earnings threshold.
This is why the marginal tax wedge is relevant for understanding how workers might benefit (or not) from an increase in pay once taxes enter the picture.
While the Australia tax and benefit system can be successful in keeping low-income working households out of poverty and encouraging workforce participation, high marginal tax rates like the one observed in the case of this Australian working parent act as barriers to upward mobility, discouraging parents from advancing in their careers. Very often these high rates are hidden in complex tax structures. However, a recently published study by Archbridge Institute and Tax Foundation highlights the underlying policies that drive the marginal tax rate spikes that workers are subject to in a number of countries.
|Australian Single Worker with Two Children Average Labor Cost: AUD 98,269 (US$65,689)|
|Total Labor Cost||AUD 60,927||AUD 83,528||AUD 105,147||AUD 114,974|
|Net Earnings Before the Raise||AUD 71,249||AUD 74,071||AUD 83,323||AUD 82,990|
|Amount of the Raise||AUD 983||AUD 983||AUD 983||AUD 983|
|Amount of Additional Tax/Benefits Reduction Due to the Raise||AUD 6,410||AUD 2,120||AUD 4,045||AUD 1,842|
|% of the Raise Eaten up by the MTR||652.31%||215.77%||411.60%||187.40%|
|Net Earnings After the Raise||AUD 65,821||AUD 72,934||AUD 80,261||AUD 82,131|
|Source: OECD, “Taxing wages – Tax wedge decomposition,” https://stats.oecd.org/Index.aspx?DataSetCode=TXWDECOMP; OECD, “Taxing wages – Comparative tables,” https://stats.oecd.org/Index.aspx?DataSetCode=AWCOMP; and Tax Foundation calculations.|
When moving up the income ladder an Australian worker with children can face tax rate spikes of over 100 percent at four different points due to the Family Tax Benefit and the Parenting Payment Single.
In 2021, the first marginal tax rate spike occurred at 62 percent of the average wage and approximately 73 percent of the median wage. If the employer of this Australian worker increased compensation by just AUD 983, the worker faced a net loss and saw his earnings cut by AUD 5,428. This Australian parent faced a marginal tax wedge of 652 percent for a 1 percent increase in gross earnings on top of the gross annual wage of AUD 57,854. This is due to the clawback of the Parenting Payment income support that…