4 Empirical Results: Introduction of 39 Per cent Rate

This section presents estimates of taxpayers' responses to changes in marginal tax rates, following the introduction of the 39 per cent top personal marginal rate. Elasticities of taxable income are reported for all taxpayers and for females and males separately. The first set of estimates are obtained using equation (4), calculated for different taxpayer groups. The second set of estimates of the elasticity are based on the difference-in-difference estimate, given by equation (7).

4.1 Income Shares and Average Marginal Rates

First, information about the average rates faced by different groups is summarised in Figures 3 to 5. These diagrams plot the average marginal tax rates faced by the top decile, the ninth decile and the combined eighth and seventh deciles (the fourth quintile) of income earners, along with their shares of taxable income from 1994 to 2008. Figure 3 shows that between 1994 and 2000 all top decile income earners faced a marginal tax rate of 33 per cent. Over this period their share of taxable income increased from 33.7 per cent in 1994 to 36 per cent in 1999. Following the announcement of the 39 per cent top personal rate for income above $60,000 the top decile's share of taxable income rose sharply to 38.9 per cent in 2000. However, following the introduction of the 39 per cent rate it fell to 33.9 per cent in 2001. Between 2001 and 2008 the share of taxable income obtained by the top decile fluctuated between 33.7 per cent in 2008 and 34.6 per cent in 2005. The introduction of the 39 per cent rate led to an increase in the average marginal tax rate of the top decile. By 2006 all top decile earners faced the new top marginal rate of 39 per cent.

Figure 3 – Top Decile Income Share and Average Marginal Tax Rate

Figure 4 – Ninth Decile Income Share and Average Marginal Tax Rate

Figure 5 – Combined Seventh and Eighth Decile Income Share and Average Marginal Tax Rate

Figure 4 shows that over the period 1994 to 2008 those in the ninth decile of taxable income contributed, on average, 17.3 per cent to the personal income tax base. Their marginal tax rate averaged 33 per cent from 1994 to 1998 and 2002 to 2006. Between 1999 and 2001 it fell below 33 per cent for three years following a threshold and a tax rate adjustment of the middle rate. The average marginal tax rate reached 34.1 per cent in 2007 and 34.9 per cent in 2008 as the number of taxpayers who moved into the top tax bracket increased.

Figure 5 shows that between 1994 and 1996 the average marginal tax rate of the seventh and eighth deciles of taxable income was around 31 per cent. However, it fell sharply to reach a low of 26.1 per cent in 2000 due to various threshold and tax rate adjustments. Since 2001 it has been rising steadily to reach 34 per cent in 2008. Over the period 2000 to 2008 these income earners experienced a slightly larger increase in their average marginal tax rate than the top decile of income earners (7.8 percentage points compared with 6 percentage points). But, in contrast to the top decile earners whose share of taxable income fell, their contribution to the personal income tax base rose slightly. It averaged 30.3 per cent between 1994 and 2000 and 31.1 per cent between 2001 and 2008.