Work incentives in Australia: The distribution of effective marginal tax rates for working‐age Australians in 2023

Abstract

Effective marginal tax rates are of interest to policymakers due to the concern that high rates lead to disincentives to work, particularly for secondary earners in couple families and single parents who pay personal income tax and lose government welfare payments as their private income increases. Hypothetical models of the tax and welfare system demonstrate the possibility of high effective marginal tax rates particularly for secondary earners in lower income families where personal income tax intersects with the loss of means‐tested welfare payment. This paper estimates effective marginal tax rates across the whole working‐age population, rather than for hypothetical families, using a microsimulation model based on a nationally representative sample of Australians. These distributional estimates suggest that high and very high effective marginal tax rates are relatively rare and that most persons of a working‐age face rates that are relatively modest. The paper extends previous work on distributional effective marginal tax rates to include the impact of formal childcare and the higher education loan program.