Peter Costello is
spot-on regarding tax. Thanks to a generous pension and tax system, few
retirees pay income tax any more; while the equally generous family
benefit package effectively wipes out the tax that was once paid by
low-income families. For example, a single income family on $35,000 a
year with two children under 13 receives $9,232 a year in family tax
benefits. Their tax bill would be just $6,700. This leaves the entire
personal tax burden on the shoulders of the relatively few Australians
who earn more than $45,000 a year.

Only five years ago the top
rate of 47% cut in when income reached just $50,000 a year, but tax
cuts since then have increased this to $70,000 a year. Even at that
level the unions have been vocal in their criticism claiming that it
wasn’t worth working overtime, because it meant giving the taxman half
of their extra earnings.

Now, in an unprecedented measure, the
top rate has been raised to $95,000 from 1 July 2005, and to a
staggering $125,000 from 1 July 2006. Other tax changes mean that
workers will not leave the 30% band until they earn $70,000 a year. For
years there have been calls for a flat tax; under the tax scales coming
in effect in July 2006 anybody earning $70,000 a year will pay just
$16,860 in tax which is equivalent to a flat rate of 24%. How much
better can it get?

There were calls to cut the top tax rate to
30% to bring it into line with the company tax rate. It was
impracticable, as the welfare lobby would have gone ballistics. But,
you have to do the figures to see how clever Treasury have been. After
1 July 2006, the tax on an income of $100,000 will be $29,460.
Virtually 30% flat – exactly the same as the company rate.

A $125,000 threshold for the top tax rate of 48.5% (including Medicare
levy) might sound “staggering” but it’s still a high rate and low entry
point by world standards. The top rate of British tax is 40%
and it kicks in at $84,000. In the US, the top tax rate is only 35% and
you have to be
earning $420,000 to pay that. Even an emerging economy like India only
has a top rate of 30%, although it kicks in at around $5000.