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4.4 Top marginal tax rate

Chart 4.9 shows the top marginal tax rate3 for all OECD countries and the threshold to which the top marginal tax rate applies. The top marginal tax rate threshold is expressed as a multiple of the OECD’s measure of average wages (see Box 4.2).

Chart 4.9: Top marginal tax rates and thresholds (unweighted averages)

OECD-30, 2005

Chart 4.9: Top marginal tax rates and thresholds (unweighted averages), OECD-30, 2005

Source: OECD Tax Database (preliminary data).

In 2004-05 Australia’s top marginal tax rate applied to incomes over A$70,000. This equated to around 1.4 times average wages. The top marginal tax rate in 2006-07 will apply to incomes over A$125,000. This equates to around 2.2 times average wages. Australia’s top marginal tax rate is 48.5 per cent (including the Medicare levy). Chart 4.9 includes unweighted OECD-30 averages for the top marginal tax rate and the top threshold. The unweighted OECD-30 average threshold is 2.4 times average wages and the unweighted OECD-30 average top marginal tax rate is 46.7 per cent.

Australia’s top marginal tax rate is eleventh highest in the OECD-30. The threshold to which Australia’s top rate applies is currently ninth lowest in the OECD-30. However, changes to the threshold from 1 July 2006 will result in Australia’s ranking moving to twelfth highest in the OECD-30.

Chart 4.10: Top marginal tax rates and thresholds (unweighted averages)

OECD-10, 2005

Chart 4.10: Top marginal tax rates and thresholds (unweighted averages), OECD-10, 2005

Source: OECD Tax Database (preliminary data).

Chart 4.10 isolates the top marginal tax rate and threshold for only the OECD-10. The unweighted average threshold is 3.1 times average wages and the unweighted average top marginal tax rate is 45.8 per cent.

Chart 4.11 replicates Chart 4.9 but uses GDP OECD-30 weighted averages rather than OECD-30 unweighted averages.

Chart 4.11: Top marginal tax rates and thresholds (weighted averages)

OECD-30, 2005

Chart 4.11: Top marginal tax rates and thresholds (weighted averages), OECD-30, 2005

Source: OECD Tax Database (preliminary data).

The weighted average threshold is 5.6 times average wages. Chart 4.11 illustrates the significance of the United States when computing a measure of weighted averages as the weighted average threshold is higher than the individual threshold for every other OECD country.

Chart 4.12 shows the change in the top marginal tax rate for the OECD-30 from 2000 to 2005.

Chart 4.12: Top marginal tax rates

OECD-30, 2000 and 2005

Chart 4.12: Top marginal tax rates, OECD-30, 2000 and 2005

Source: OECD Tax Database (preliminary data).

Since 2000, seventeen countries in the OECD-30 have reduced their top marginal tax rate by varying magnitudes. This includes six countries in the OECD-10. Nine countries in the OECD-30 have increased their top marginal tax rate including two of the OECD-10. Australia is one of four countries in the OECD-30 that has not changed the top marginal tax rate (one of two in the OECD-10).

Chart 4.13 shows the change in the top statutory marginal tax rate for the OECD-30 from 2000 to 2005. The statutory rate is a partial measure that only includes the combined national and sub-national personal income tax rates. It does not include employee social security contributions.

Chart 4.13: Top statutory marginal tax rate

OECD-30, 2000 and 2005

Chart 4.13: Top statutory marginal tax rate OECD-30, 2000 and 2005

Source: OECD Tax Database (preliminary data).

Since 2000, nineteen countries in the OECD-30 have reduced their top statutory marginal tax rate by varying magnitudes. This includes five OECD-10 countries. Only two countries in the OECD-30 increased the top statutory marginal tax rate (only one in the OECD-10). Australia is one of nine countries in the OECD-30 that has not changed the top statutory marginal tax rate (one of four in the OECD-10).

Charts 4.12 and 4.13 are limited to changes in marginal tax rates and do not consider movements in thresholds. In Australia’s case, the threshold to which the top marginal tax rate applies has increased from A$50,000 in 1999-00 to A$70,000 in 2004-05 and will move to A$125,000 in 2006-07.

Box 4.3: Australia-United States comparison4

Calculating the tax wedge can be highly dependent on the location of the individual even within a country.

A highly stylised cameo that illustrates the difference in the tax wedge across and within countries is to compare a single high-income earner in Sydney to a single high-income earner in New York, Los Angeles and Houston.

The results in the table below illustrate the importance of taking into consideration all elements of the tax wedge when making international comparisons.

An analysis of the tax wedge includes the impact of federal, state, and city income taxes, social security contributions, the Medicare levy and payroll taxes. The analysis allows for state and local taxes to be claimed as a deduction from United States federal income tax. United States taxpayers are also entitled to a ‘personal exemption’ on their federal income tax. However, the analysis does not take into consideration the full range of deductions, such as work related deductions, that are available to the taxpayer in each country.

All-in tax wedge — single individual, no dependants

All-in tax wedge — single individual, no dependants

Source: Australian Treasury calculations; United States Revenue Service; New York State Department of Taxation and Finance; Californian Franchise Tax Board; Texas Workforce Commission.

Box 4.4: Flat income tax systems in Eastern Europe

Over the past ten years there has been an increase in the number of flat income tax systems, especially in Eastern Europe. Flat income tax systems have been adopted in Estonia (1994), Lithuania (1994), Latvia (1995), Russia (2001), Serbia (2003), Slovakia (2004), the Ukraine (2004), Georgia (2005) and Romania (2005).

A pure flat income tax system taxes income at the same percentage rate along the full range of income. Most countries that have a flat income tax system also have either tax credits or a tax free threshold which adds a degree of progressivity to the system.

The main reasons that flat income tax rate systems have been adopted in Eastern Europe are:

  • to encourage higher compliance with the tax system. Tax administration in some economies was extremely weak, with significant informal economic activity outside the tax system;
  • to reduce complexity. Many of the economies in Eastern Europe that have adopted flat income taxes had various taxes at a range of rates that made it difficult for taxpayers to understand their tax obligations; and
  • as part of broader tax reform to join the European Union.

Economies that have adopted flat income tax systems tend to have high levels of social security contributions. In many of the Eastern European economies social security contributions are the main element of the tax burden on labour.

The effect of introducing a flat income tax system on the tax burden can be illustrated by considering the experience in the Slovak Republic. This is the only ‘flat tax country’ in Eastern Europe that is a member of the OECD and as such is the only economy where OECD data are available on the tax wedge. The taxation of labour income in the Slovak Republic is similar to other Eastern European economies as social security contributions greatly exceed personal income taxation revenue.

In 2003, the personal income tax system in the Slovak Republic had five income brackets, with tax rates varying from 10 per cent to 38 per cent. A taxpayer on average earnings would face a marginal tax rate of 20 per cent. The corporate tax rate was 25 per cent, while the VAT rate was 20 per cent. In 2004, all of these rates were replaced with a flat tax rate of 19 per cent. The introduction of the flat rate was combined with a large increase in the basic allowance (it was more than doubled) and the removal of many forms of tax relief which led to a broadening of the tax base.

Table 4.1 compares average income tax rates and the tax wedge for a single individual in 2003 and 2004 (before and after the introduction of a flat tax system) for different percentages of average earnings. Despite the introduction of a flat income tax system, there have only been small changes in the tax wedge facing individuals for different income levels (see Table 4.1).

Table 4.1: Average income tax and tax wedge for a single individual before and after Slovak reform (2003 versus 2004)

Table 4.1: Average income tax and tax wedge for a single individual before and after Slovak reform (2003 versus 2004)

Source: OECD An International Perspective on Japanese Tax Reform, 2006.

Russia also introduced a flat income tax system in 2001. A single 12 per cent rate replaced a progressive schedule with rates of 12, 20 and 30 per cent; various exemptions from tax were eliminated; social security contribution rates were reduced; and the maximum tax free threshold was increased. As Russia is not a member of the OECD there is no comparative tax wedge data available to analyse the net effect of these changes.

 


3 The top marginal tax rate is the all-in top marginal tax rate as calculated by the OECD. The all-in top marginal tax rate includes national and sub-national government personal income tax, plus employee social security contributions (as well as the impact of deductibility of social security contributions from national government taxes), resulting from a unit increase in gross wages.

4 Rates, thresholds and deductions for the New York state and city analysis are based on the latest information. However, New York State’s budget is currently under negotiation and some items could change retroactively for tax year 2006. Calculations for Los Angeles are based on the latest Californian tax rates in 2005 (2006 rates are not available until August). Texas does not levy state personal income tax.

 

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