• Robert Tanton

17 June 2010Robert Tanton from NATSEM looks at how the cuts affect different households

WE ALL LIKE tax cuts. The sound of a tax cut suggests more money in our pockets to pay mortgages and rent, buy food, send children to school, or pay our everyday bills. But the interesting thing about tax cuts is that they affect people in quite different ways – they can be designed so that nobody loses money, for example, but only people earning a certain amount gain.

Using NATSEM’s tax/transfer microsimulation model, STINMOD, we have been able to analyse who will benefit from the tax cuts being given on the 1 July this year. These changes in the tax rates and cutoffs are shown in Table 1. The first change is to the second taxable income range, where the cut-off increasese from $35,000 to $37,000. The second change is to the tax rate for the fourth income band, which reduces slightly from 38 per cent to 37 per cent. These two changes are shown in bold in Table 1. The third change is to the low income tax offset, which increased to $1500.

Table 1: Tax cuts from 1 July 2010

When the changes were announced last month the Budget Papers and many newspapers showed how much extra people at different income levels would get in after-tax income. Because of the way that the tax system works, people with higher incomes were always going to benefit more from the cuts.

But the coverage at the time did not show how much each type of family will get. We know that single parents, for example, earn less because of the need to balance looking after children and working, so they will get less from a tax cut.

In this analysis, we have looked at how much people will receive from the tax cuts by family type. Our analysis shows that of 11.3 million families across Australia, 7 million will benefit from the tax cuts and 4.3 million will see no difference in their incomes. For those 7 million who do benefit, the average increase will be $10.26 per week, or $533.52 per year. The average increase across all families in Australia (which includes those who did and didn’t gain) was $6.37 per week, as shown in Table 2.

Table 2 shows the average increase for different types of families. It can be seen that the greatest increase is for married families with children, and the second greatest increase is for married families with no children. Much of this is because in these types of families, both couples are working.

One of the lowest increases was for sole parent families ($3.72 per week), possibly because these families are usually on lower incomes, but also because many in this group rely on government benefits, which means they are in the group of 4.3 million people that gains nothing from these tax changes. In fact, when we looked at the proportion of people who gain nothing from the tax changes, 54 per cent of sole parent families gain nothing, compared to only 7 per cent of married couples with children and 38 per cent overall.

Even the increase in the low income tax offset, which presumably was designed to assist people on low incomes, was only about $1 per week for sole parent families.

Families with one single adult only (normally age pensioners) also received little from the tax changes. Again, this is possibly because many of these people live on pensions, so are not paying tax and do not benefit from any tax cuts. The result (similar to that among single parents) is that 47 per cent of single adults gained nothing from the changes.

Table 2    Increase in take home pay from 1 July 2010 tax cuts by family type

 
What this analysis of the changes in tax shows is that any fiddling with tax rates only affects a proportion of the Australian population – those paying tax, who make up about 62 per cent of the Australian population.

Because of this bias in the impact of the policy, the main beneficiaries of the coming tax cuts will be married families. Those with children will gain on average $660 per year, and 93 per cent of them will gain some benefit. Those without children living at home will gain around $380 per year, and 57 per cent will gain.

Those who don’t gain as much will be sole parents and single people (usually pensioners). These families will gain about $200 per year from the tax cuts, and only about half of them will gain something.

Many of these single aged pensioners have also received an increase in pensions through the increase in the single age pension in 2009, when the parenting payment single was not increased. However, many sole parents received the most from the federal government’s stimulus package (an average $47 per week, see Who received most from the stimulus package?), while single age pensioners did not ($17 per week). So it is difficult to say who in total is better off.

What we can say is that married families with children gained from the Household Stimulus Package ($46 per week) and the coming tax cuts ($12.68 per week), so they are certainly beneficiaries of the current government’s policies. •

Robert Tanton is Principal Research Fellow at the National Centre for Social and Economic Modelling (NATSEM)

Photo: Andrew Jeffrey