Carbon tax “compensation”

This is an analysis of the income tax compensation offered under Labor’s proposed carbon tax.

Firstly, lets have a look at the 2010-2011 tax brackets, taking into account the LITO (Low Income Tax Offset):

Bracket 2010-2011 Rate
$0-$16000 0%
$16000-$30000 15%
$30000-$37000 19%
$37000-$67500 34%
$67500-$80000 30%
$80000-$180000 37%
$180000- 45%

Lets have a look at the proposed 2012-2013 rates, again, taking into account the LITO, which has now been reduced from $1500 to $445, and had it’s withdrawal rate reduced from 4% over $30000 to 1.5% over $37000.

Bracket 2012-2013 Rate
$0-$20542 0%
$20542-$37000 19%
$37000-$66667 34%
$66667-$80000 32.5%
$80000-$180000 37%
$180000- 45%

Lets compare these two rates:

Bracket 2010-2011 rate 2012-2013 rate Change Tax cut at top of bracket
$0-$16000 0% 0% 0% $0
$16000-$20542 15% 0% -15% $681.32
$20542-$30000 15% 19% +4% $303
$30000-$37000 19% 19% 0% $303
$37000-$66667 34% 34% 0% $303
$66667-$67500 34% 32.5% -1.5% $315.50
$67500-$80000 30% 32.5% +2.5% $3
$80000-$180000 37% 37% 0% $3
$180000- 45% 45% 0% $3

As you can see, people earning just over $20000 will get a $681 tax cut, which slides down to $303 for those on $30000 a year. After $67500, this tax cut continues to reduce to only $3 at $80000.

However, the problem here is that we’re comparing apples with oranges. With changes in the CPI (inflation), 2010-2011 dollars are not 2012-2013 dollars.

So lets adjust 2010-2011 dollars to 2012-2013 dollars. I’ll assume a CPI increase over those two years of 6%, which I believe is fairly modest (less than 3% a year). So if we adjust the 2010-2011 tax brackets, we get the following:

Bracket Bracket in 2012-2013 dollars Rate
$0-$16000 $0-$16960 0%
$16000-$30000 $16960-$31800 15%
$30000-$37000 $31800-$39220 19%
$37000-$67500 $39220-$71550 34%
$67500-$80000 $71550-$84800 30%
$80000-$180000 $84800-$190800 37%
$180000 $190800- 45%

So we’ll now compare the tax rates:

Bracket in 2012-2013 dollars 2010-2011 rate 2012-2013 rate Change Tax cut at top of bracket
$0-$16960 0% 0% 0% $0
$16960-$20542 15% 0% -15% $537.32
$20542-$31800 15% 19% +4% $87
$31800-$37000 19% 19% 0% $87
$37000-$39220 19% 34% +15% -$246
$39220-$66667 34% 34% 0% -$246
$66667-$71550 34% 32.5% -1.5% -$172.57
$71550-$80000 30% 32.5% +2.5% -$383.82
$80000-$84800 30% 37% +7% -$719.82
$84800-$180000 37% 37% 0% -$719.82
$180000-$190800 37% 45% +8% -$1583.82
$190800- 45% 45% 0% -$1583.82

As can been seen, when accounting for inflation, anyone on just over $30000 is hardly getting any compensation, and anyone over $40000 is actually going to get a $246 a year income tax hike.

Furthermore, the 2015-2016 brackets are unchanged from 2012-2013 except for a $437 rise in the tax free threshold. Inflation would have eaten away at the rise in the tax free threshold by that time, and indeed by then everyone will be paying more income tax.

Calling this compensation is a bit of a joke in my opinion.

Worked example – $37000 a year income earner:

Lets take a full time worker who earnt $37000 in the 2010-2011 financial year. These are the sort of low-middle income earners who are apparently fully compensated under the carbon tax.

This worker will have an income tax bill of $4650, minus the LITO, which is $1500 minus 4c for every dollar over $30000. This means the LITO for this person is $1500 – 7000 * 4c = $1500 – $280 = $1220.

So their tax bill  for the 2010-2011 financial year is $3430.

Now lets consider this worker in 2012-2013. Lets say their rate of pay stays the same in real terms, as in, it only keeps pace with inflation.

This would put their income 2012-2013 at $37000 plus an additional 6% (3% inflation for two years). So their income is now $39220.

Keep in mind they haven’t really got a pay rise, they’re just getting paid more dollars that are now worth less.

Being a low-middle income earner, they should now pay a lot less tax, so they are compensated for the price increases resulting from the carbon tax.

But lets see what happens:

Tax on first $18200 = $0 (tax free threshold)

Tax on $18200 to $37000 (at 19%) = $3572

Tax from $37000 to $39220 (at 32.5%) = $721.50

New low income tax offset = $445 – (1.5c for each dollar over $37000) = $445 – 1.5c * 2220 = $411.70

Total tax paid for 2012-2013 financial year under compensation = $3572 + $721.50 – $411.70 = $3881.80.

Remember the 2010-2011 tax bill of $3430? To be fair, we should put this in 2012-2013 dollars.

So we get 2010-2011 tax bill (in 2012-2013 dollars) is $3430 plus an additional 6% = $3635.80.

The 2012-2013 tax bill is not cheaper as would be expected under compensation, but $246 more expensive in real terms.

To put it another way, in 2010-2011 this person was paying 9.27% of their income in tax before the carbon tax “compensation”.

In 2012-2013, with no real pay rise, they’ll be paying 9.9% of their income in tax.

That’s their “compensation”, an increase in their tax bill by almost 7%.

They’re already behind even before they face increased prices due to the carbon tax.

If we do the same thing for the 2015-2016 brackets, even assuming inflation at only 2.5% per annum, a $37000 wage earner would be paying $817.10 more income tax in 2015-2016, an increase in their tax bill of over 20%.

37 thoughts on “Carbon tax “compensation”

  1. Clinton – great to see somebody so quick of the mark with this sort of analysis. I agree that both LITO and inflation are an important part of the analysis. Your tables indicate that the government is playing smoke and mirrors with the Australian public.

  2. You’re combining the general effects of bracket creep with the carbon tax. If there were no carbon tax and no compensation, all the numbers in your table would be negative.

  3. John – yes if there were no tax cuts then bracket creep would be still increasing our taxes. However the comparison that Clinton has made is still fair because it tells us that the government isn’t going to compensate for bracket creep. In previous years we have had tax rate reductions and bracket increases to compensate somewhat for bracket creep without the government introducing a new tax.

  4. The LITO has risen from $1200 -> $1350 -> $1500 from 2008-2009 to 2010-2011 and the 30% bracket start from $34000->$35000->$37000.

    This is normal movement of tax brackets to account for inflation. It’s not compensation.

    In any case, the question “will I be better off under a carbon tax” for income earners over $40000 is quite clearly, no. If you like you could do a comparison by continuing the historical increases in the LITO and 30% bracket, but I think you’d find that would actually make my case stronger.

  5. Pingback: A closer look at the income tax changes « John Humphreys

  6. You’re combining the general effects of bracket creep with the carbon tax.

    Actually, it’s just looking at changes to income tax table. Increases in cost of living from carbon tax and increases in welfare/pensions etc, are separate. The income tax changes can hardly be seen as compensation when most taxpayers will be worse off than last year.

    Remember, ALP strategy is that people will be OK with the tax once it’s in effect – but that’s not going to happen if people think they are worse off.

  7. By the way, I have not included the Medicare Levy, but for comparisons sake it probably makes little difference.

  8. John : In any case, I refuse to perform the doublethink required to believe that a person on an unchanged income of $40000 in 2010-2011 dollars who is paying a greater proportion of their income in tax in 2012-2013 than in 2010-2011 is somehow getting compensation.

  9. Brilliant analysis. You don’t often see the tax brackets with the LITO taken into account. When you do see them it all looks lauguably stupid.

  10. A great, thought provoking post, which we are sadly unlikely to see replicated in the more mainstream media.

    Has been shared.

  11. I might have misunderstood the conclusion/terms being used, but isn’t the difference between this person’s 2010-11 tax payment (9.27% of their income) and their 2012-13 tax payment (9.9% of their income) 0.7%, as opposed to the 7% concluded above?

  12. Curioususer: Thanks for the question. In a way, we’re both right.

    Their tax payment has increased by 7%, and they are now paying 0.7% more of their income in income tax.

    The point I’m trying to make is that the ATO will take 7% more money from current $37000 real wage earners. For every $100 they took before, in real terms in 2012-2013 they’ll take $107. I don’t think that’s compensation.

    The other way you could look at (as you have) is that an extra 70c out of every $100 they earn is now going to the tax department. When people are living on the borderline with mortgage repayments/rent/cost of living eating 95% of their budget, then taking 70c out of that spare $5 is a big deal.

    I’m not talking about the mega rich here. I’m talking about people on $18.70 an hour for a 38 hour week.

  13. It doesn’t mater what you work it out to. This will be end up being a free range money grab in the future as it is not protected like the GST is. Labor will not be able to help itself. Eventually they will see the potential to get them out of trouble for over spending. Make up a story and start filtering some money away. They don’t Govern. They tax. And this comment from a use to be Labor supporter. This country has no where to turn anymore. We are not the lucky country. We are not even a fair dinkum country anymore. Grab hold of your seats Australia as we are approaching the worlds biggest roller coaster ride.

  14. When ever you see complex tax tables it shows you two things; first of minor importance, the governemnt wants to employ lots of bureaucrats (how many tax officials would be needed if all we had was a sales tax?). Second the minor point, they want to make it confusing and opaque because they are thieving criminal scum!

  15. I’m confused i thought these measures will come into effect on 1 July 2012, why do the tables here refer to the tax year 2010-2011 with the $1600 threashold?

  16. I’m comparing the 2010-2011 tax rates to the 2012-2013 tax rates to show that the proposed “compensation” is actually a tax increase when you take into account inflation. So I refer to both the 2010-2011 rates and the 2012-2013 to compare them.

  17. Clever way to make it look like people are worse off, but not really.

    By only considering the tax break points while ignoring the rise in income that causes the tax increase, you make a logical sounding case, but lets take a closer look.

    Lets take a person earning $70,000 a year. Given the 6% CPI rise you based your calculations on, they would be earning $74,200 and so would be paying more tax it is true. THey would also of course be EARNING more.

    Pre carbon tax they would pay $14,650 on their $70,000 a year income leaving them a post tax income of $55,350.
    Post carbon tax, they would pay $15662 on their $74,200 income leaving them a post tax income of $58538. Subtract the $510 carbon tax cost of living increase and their post tax income is $58028.

    IE, they have $2678 more money in their pocket than they had before the carbon tax.

    Of course these numbers are just as rubbery as yours.
    The $2678 extra is worth 6% less than it was prior to the CPI increase and takes no account of the increased prices due to the CPI rise.
    The fact is though that the actual effect of fiscal drag on your disposable income depends on the difference between the essential expenditures (rent, food etc) and the discretionary expenditures (entertainment, holidays etc) and this will be different for everyone.

    Fiscal drag tends to lower your effective income but it needs to be remembered that tax is always lower than 100%, so you are better off getting a payrise even if it moves you into a higher tax bracket.

  18. Your tax rates are wrong though.

    2010-2011 does NOT have a 16k tax free threshold it is 6k still (Your brackets are wrong Also you used a random number in your 37k case study example of 18200 for the tax free threshold on a 2012/2013 tax example. What are you doing? It is over 20k at this stage.

    You can’t even reproduce your own figures correctly let alone work it out properly!

  19. Gregory:

    Firstly, let me correct some figures. Feel free to recorrect me if you think these are wrong.

    Pre carbon tax 2010-2011 tax = 4650 + 0.3 * (70000 – 37000) = $14550 ($100 less than you mentioned).

    Post carbon tax 2012-2013 tax = (37000 – 18200) * 0.19 + (74200 – 37000) * 0.325 = $15662 (correct)

    Pre carbon tax post tax income = $70,000 – $14550 = $55450 (2010-2011 dollars)

    Post carbon tax 2012-2012 post tax income = $74,200 – $15662 = $58538 (2012-2013 dollars)

    You then said, “IE, they have $2678 more money in their pocket than they had before the carbon tax.”

    Actually, you can be even more generous here. I’m happy to ignore the cost of living increases from the carbon tax you mention, and assume they’re zero. So lets say this person will have $3088 more dollars in their pocket with the carbon tax!

    But is a person who has $100000 in 2011 more rich than someone who has $80000 in the seventies? I don’t believe so. $100000 would barely buy a studio apartment nowadays, $80000 in the seventies would by at least two of my childhood family home.

    The way we compare such dollar amounts in different years is typically is adjust for inflation. So when we convert the post tax 2010-2011 income to 2012-2013 dollars, we get the following:

    Pre carbon tax post tax income (2012-2013 dollars) = Pre carbon tax post tax income (2010-2011 dollars) * 1.06 = $55450 * 1.06 = $58777 (2012-2013 dollars)

    Whereas, post carbon tax post tax income is, as you calculated above = $55450 (2012-2013 dollars)

    The carbon tax has resulted in this persons real post tax income going down by $227 in 2012-2013 dollars. We can adjust that back to 2010-2011 dollars by dividing by 1.06 and we see that this person is worse of by $227 / 1.06 = $214.15 in 2010-2011 dollars.

    Keep in mind this person is worse of before the cost of living increases caused by the carbon tax, which for the purpose of this post I’ve ignored.

    That loss of $227 @ $74200 (2012-2013 dollars) is right between the loss at $172.57 @ $71500 (2012-2013 dollars) and $383.82 @ $80000 (2012-2013 dollars) in the tables above.

    Perhaps a simpler way of looking at this is the percentage of income tax paid out of total income.

    Percentage of income tax 2010-2011 = 14550 / 70000 = 20.786%
    Percentage of income tax 2012-2013 = 15662 / 74200 = 21.108%

    Now if someones real wage has stayed the same, and the percentage of their wage taken in tax has increased, it is clear that their post tax wage in real terms must have decreased.

  20. Snook – you have completely ignored LITO. Do you know what LITO is? Do you know how LITO works?

  21. “2010-2011 does NOT have a 16k tax free threshold it is 6k still”

    You’ve forgot about the LITO. I’ve included it into my brackets.

    Try the comprehensive ATO tax calculator here:

    Put in $16000 income. You’ll notice you’ll pay no tax. The “tax free threshold” and the “amount you have to pay tax” are two different things confusingly. PAYG withholding complicates things more.

    However, my 2010-2011 brackets in the first table should match what the tax calculator provides (except for the Medicare levy). Keep in mind I haven’t included the Medicare levy in my calculations, but as far as I know it isn’t changed much by the carbon tax. If it has I’ll redo the figures to include it.

    Please do reply if you notice any discrepancies with the ATO calculator and the tax calculated from 2010-2011 brackets I’ve provided, I’ll definitely correct those.

  22. Pingback: Carbon Tax Fallout: tax rates for low-income earners up, plus, “what compensation?” « The Tizona Group

  23. I find it some sad that what you said is so obvious. My jaw hit the flaw when I say the 2015 rates that were virtually the same. Compensation my ass.

    I can’t believe that no one in the mainstream media even pics up on this. In reality no one is being compensated. By 2015 an average family will be over $25 a week worse off just through taxes, let along the carbon tax.

    The carbon tax figures are fudged just as badly, but they will take a lot longer to show why. Its pretty simple: carbon costs $23/tonne. 1kwhour produces 0.001 tonnes. Therefore electricity will increase by 2.3cents per kilowatthour. This is an increase of 10% to 20% depending on your tariff. Way higher than what the government claims.

    The other interesting thing is how they limit it to 500 companies without a proper cutout or fade zone. So if two competitors are say 510th and 490th emittors, but have similair products and volumes, one is going to have to pay the tax and one isn’t. In some industeries this gives companies as massive advantage. Infact whats to stop a larger company just breaking into little ones? The whole scheme is madness.

  24. What about the effect on inflation(Only 0.7%) I bet the reserve bank wont be happy with that and a interest rate hike will be on the cards.

  25. Noddy: That’s a good point but what I’m trying to show is that even without interest rate rises or cost of living increases anyone on over $37000 is still worse of under Labor’s carbon tax.

  26. The only good tax is- a dead one!
    The Australian keeps on printing news that makes the IPCC look incompetent. Who’d have guessed? It now seems the rate of rise is getting smaller, according to recent measurements.
    So, do we need any carbon tax? (Hint- any answer greater than zero is wrong.)

  27. Doesn’t anyone say anything? This used to be a vibrant place, full of comments- now a weekend with nothing!

  28. Why would you expect that with inflation trending up and the Government relying on inflation to balance their budget?

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