Effective Marginal Tax Rate

7.7 EMTR is the percentage of additional income lost due to the withdrawal of means-tested benefits (such as social security payments) and additional income tax payable as a result of working. A higher EMTR may discourage workforce participation, including among mature age cohorts. As found in the Tax Review, ‘effective tax rates can be high for some people, including for those likely to reduce their level of work as a result’.[5]

7.8 The ACTU suggested that people are more likely to work ‘if they keep a larger proportion of an extra dollar they earn, in particular, low-income earners who are more responsive to changes in their net incomes’. However, it stated that tax reforms should be targeted at low and middle income earners, ‘where they get the biggest “bang for the buck”’—therefore arguing against tax cuts for higher-income earners aged over 45 years.[6]

7.9 COTA Australia (COTA) was also concerned with reducing the EMTR, stating that:

The interaction of the now increased income tax free threshold, income free threshold, taper rates and marginal tax rates need to be examined to see if there are ways to reduce the effective marginal tax rates that people face when they move between the transfer and tax systems.[7]

7.10 The Tax Review addressed this issue in a ‘key point’ underpinning recommended reforms to this area. It stated that the income tax system should ‘support workforce participation by limiting high effective tax rates, especially for those people who are likely to be most responsive to financial incentives to work’.[8]

[5] Ibid, pt 2, vol 1, 21.

[6] ACTU, Submission 38.

[7] COTA, Submission 51. As discussed below, from 1 July 2012, the Australian Government has increased the tax-free threshold: Australian Government, Budget 2012–13: Budget Overview (2012) (2012) <www.budget.gov.au> at 3 September 2012, ‘Tax Reform—Road Map’.

[8] The Treasury, Australia’s Future Tax System: Final Report (2010), pt 2, vol 1, 11.