The Deficit Levy Means Australia's Rich Now Pay One Of The Highest Income Tax Rates In The World

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The deficit levy on Australia’s rich will see tax rates rise in line with some of the highest levels in the world and it isn’t the best strategy to bring the budget back to surplus, one Australian economist says.

The “temporary” 2 per cent levy will be payable on incomes over $180,000. (There’s more on how it works here.)

But in a research note today, Bank of America Merrill Lynch’s Australian economist Saul Eslake said there “may have been better ways of achieving that goal” of reducing public debt and ensuring all Australian’s contribute.

Eslake argues the levy is a political mechanism and its transient nature “does not make any lasting contribution to ‘fixing the Budget’ in a structural sense”.

The levy will take the upper echelons of the personal income tax rate from 45 to 47 per cent, or 49 per cent when you include the Medicare levy and is intended to ensure the country’s money makers “make an appropriate contribution,” Hockey said in his budget speech on Tuesday.

The Merrill Lynch chart below shows raising the income tax rate on Australia’s top earners means the country will have one of the highest top income rates, which cuts in at a level which is considered low, when compared to countries with similar taxation and political systems around the world.

Eslake said this chart shows the deficit levy and raising the high income rate tax rate “isn’t really consistent with the Government’s assertion that Australia is ‘open for business’.”

Increasing the top rate of income tax is not the answer because it will have a negative impact on Australia’s economic activity, he said.

Instead, Eslake suggests the Federal Government could achieve the same objective of sharing the load long-term without lifting the tax rate by “broadening the base of the personal income tax system” by reining in opportunities which allow all taxpayers to reduce or defer income tax liabilities.

“At least some of their increased tax payments will be absorbed by lower saving on their part, rather than lower spending,” Eslake said.

“Nor do we believe that this increase in the top income tax rate will have any material adverse impact on the labour force participation rates of those affected by it.”

He said that while the burden of restoring public finances to sustainable levels should be shared, the only way he sees high-income earners contributing an appropriate amount is by changing the tax system.

With less than 4 per cent of the country’s taxpayers being hit by the levy, Eslake is expecting many of them will make a more concerted effort to either minimise or avoid paying tax and has the potential to detract from overall economic efficiency, undermining “the integrity and equity of the income tax system,” he said.

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