Tax Progressivity in Australia: Facts, Measurements and Estimates†

Abstract

We study trends in progressivity of the Australian personal income tax system after the introduction of A New Tax System (Goods and Services Tax) Act 1999. We employ two methodological approaches: one based on tax liability progression and one based on tax liability distribution. The latter shows a cycle of lesser and greater tax progressivity in Australia between 2000 and 2018. We identify two main drivers of the tax progressivity cycle: lack of automatic indexation and mismatch between the income tax code and the evolution of market income distribution. Active tax policy with frequent adjustments to income brackets, marginal rates and offset levels drive the progressivity level before 2010. Meanwhile, inactive tax policy induces lower levels of tax progressivity after 2010 as the income tax code fails to track the changes in market income distribution. Indexation to inflation can partially mitigate the decline in progressivity; however, it is not a full substitute for a proper tax indexation system with (annual) frequent adjustments. Furthermore, we separate the contributions of taxes and transfers to overall progressivity of the tax and transfer system. We find the redistributive role of transfers is more pronounced.