Effective Marginal Tax Rates
Because reductions of means tested benefits are additive, they can lead to a very high effective marginal tax rate of tax. For example, a person with children earning $95,000 could essentially be taxed 38% income tax plus 30% in loss of FTB-A, an effective marginal tax rate of 68%. If their partner earned $7,000 then their partner could pay an effective marginal tax rate of 30% loss of FTB-A, plus 20% loss of FTB-B, giving a total of 50%. If they earn $35,000 then their effective tax rate could be 30% income tax plus 30% loss of FTB-A plus 4% loss of low income rebate giving a total of 64%.
If other means tested allowances are payable (e.g. child care benefits, superannuation co-contribution, payments for a disability etc.) then the effective rate can be over 100%.
The means testing reflects a policy of targeting welfare to people in need. However, some argue that this creates a work disincentive for middle-class families. Further, Australia’s means-tested tax and spending programs are extraordinarily complex.
Read more about this topic: Income Tax In Australia
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