Income and tax illusions

The Per Capita think-tank today released a survey of attitudes on tax and spend. The number one point they extracted from the survey results was that ‘Australians want a more progressive tax system’:

95% of respondents believe that low income earners and middle income earners are taxed too much, while only 16% believe that high income earners pay too much tax. However, only 3% of those surveyed feel low and middle-income earners pay too little tax, whereas 53 per cent believe that high income earners do not pay enough.

But as Per Capita itself notes, almost nobody believes that they personally pay too much tax. One reason for this is that many higher-income earners have an erroneous view of how well off they are relative to the community as a whole. In a 2004 paper I reported survey research asking people to place themselves in income deciles. Only 2% of people thought they were in the top two deciles.

In the 2005 Australian Survey of Social Attitudes a vaguer question was used, asking respondents to compare themselves with average family incomes. Interpreting the results is a little complicated by the biggest single group in the sample earning $52,000 – $77,999 a year, covering the then (2006 census) median family range of $52,000-$62,000 (better than the average because of the distorting effects of very high incomes). Among families earning $78,000 or more a year, a third rated their income as average or below. For the group earning $52,000 or more, 45% perceived themselves as average or below.

Even for families making $182,000 a year or more, less than half rate themselves as earning ‘far above average’, even though they were earning triple the median family income.

The survey would have been more useful if it had guided resondents as to what it meant by ‘low’, ‘middle’ or ‘high’ incomes. Per Capita has assumed (reasonably enough) that incomes over $150,000 a year are ‘high’, but this is not in the survey questions.

But how much income tax do these high income earners pay? According to the ATO’s 2006-07 tax statistics people earning $140,000 or more pay about 28% of all income taxes. They are about 3% of all taxpayers. The top 10% of taxpayers pick up 45% of the total income tax bill. By contrast, the bottom 50% of taxpayers fund about 13% of the total income tax bill.

Though the public probably doesn’t perceive it, governments have roughly been following the preferences revealed by surveys like this one. Increases in tax receipts from upper income earners and companies (the survey favours more corporate tax) have funded the increases in health spending that the survey suggests people want. But responses to polls like this tend to be formulaic reflections of general priorities rather than informed judgments on what really happens.

11 thoughts on “Income and tax illusions

  1. The whole survey is a bit strange. I don’t think the results closely support their argument at all. I was most interested in the view that people want more spent on health and education while over-estimating what is spent and less on social security while under-estimating how much is spent. Looks to me that respondent want more bang for their buck. Afterall health and education benefits the individual (or immediate family) while social security benefits others.


  2. I wonder if the results regarding where higher income perceive themselves are muddied by the emphasis on taxable income (which can be reduced by negative gearing, family trusts and business expenses) and by the distribution of wealth. An individual on $140K or a family on $182K would struggle to buy a two bedroom house in one of the better inner city suburbs these days. But people on mere top quartile incomes who bought a $300K property 15 years ago are now sitting on million dollar houses. That must colour people’s views as to how well off they see themselves.


  3. Rajat – Both the cenus and survey questions specify before tax, though of course there is no verification of either. And you are right of course that there is an important distinction between income and wealth.

    Since – Though thanks to FTB, social security reaches well into the higher income brackets.


  4. Yes. The problem is that we can’t be sure what people understand by the term social security. I suspect they mean things like the dole and not things like FTB.


  5. I have some low income relatives who are horrified by the idea that some of us pay $20K+ in tax a year.

    I tried to explain that the number of tax payers as a percentage of population is in the low 40s and that someone has to pay.

    Then I mention how much the tax payer put towards my PhD (especially once you count the investments in hardware/instrumentation).


  6. Just finished reading the survey.

    My conclusion.

    Government should ignore what people say in polls and surveys because the public are ill-informed logically inconsistent selfish idiots.

    Interesting over 65s think they pay the right amount of tax. Could that be because they probably don’t pay any tax if most of their income is from super or pension??


  7. Could that be because they probably don’t pay any tax if most of their income is from super or pension??

    That was my interpretation. 🙂


  8. This made me wonder what the income distribution is, but it has been surprisingly difficult to find. Do you know where I can find current data on the Australian income distribution?


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