Australian Tax System

How the Australian Tax System Works – An Uncomfortable Truth



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Once again, the Australia Tax System is in the spotlight.  The controversial Stage 3 Tax Cuts have become a political hot potato.

The original Stage 3 Tax cuts were part of a broader attempt to reform the taxation system.  But overnight tax reform is off the table and a splurge of simply giving money away is taking place.

What it has proved is we are well prepared to allow politicians to blatantly lie to our face, as long as we get our share of the spoils.  The so-called ‘Rich’ are already getting way too much, is being shouted like a rally cry.

But is this the right the approach? 

Are the ‘Rich’ really rich or are they just an easy target for the government?

Are we simply creating yet another social divide, so the government can garner support for yet another broken promise?

What if there were no more rich people out there to tap into?

With all these questions and arguments bouncing around I thought it was worth discussing how the Australian tax system really works.   

There is a deep uncomfortable truth behind how we fund the Australian lifestyle – and nobody wants to talk about it.  How a shrinking percentage of our population is actually funding the lifestyle we all enjoy!

Let me explain…

How Our Tax System Actually Works

Let’s kick off this conversation with the elephant in the room…that no one ever wants to talk about.

The uncomfortable truth about Australia’s tax system, is that anyone earning over $100k per year is funding the lifestyle of everyone who earns under $100k per year

Let that sink in for a moment!

In other words, those who earn under $100k per year draw more out of Government spending than they put in.  Yes, they pay their tax on their income, but they get much more back from the government than they pay.

Simply put, the top end of income earners are paying for the Australian lifestyle that everyone enjoys. 

Now I know that truth will shock a lot of people, but I feel it needs to be understood.  And before you run-off screaming “Steve, that is a horrible thing to suggest”, just relax. 

Let’s discuss it and why it is part of what makes Australia such an amazing place to live!

10 Men Walk Into A Bar…

First, I must share this with you.  I found the following buried in a social media comments section regarding the Stage 3 Tax cuts debacle, and it explains things beautifully.

10 men go out for a beer once a month, and the bill comes to $100. They decide to split the bill in a similar way to a tax bill:

Men in a Pub
  • The first four men (the poorest) pay $0
  • Fifth pays $1
  • Sixth pays $3
  • Seventh pays $7
  • Eighth pays $12
  • Ninth pays $18
  • Tenth (the richest) pays $59

The men are happy.

The pub owner decides to drop the price, so their bill now comes to $80. What do they do to split the $20 fairly? The publican suggests:

  • The first four men (the poorest) pay $0
  • Fifth goes from $1 to $0 (a 100% saving)
  • Sixth goes from $3 to $2 (a 33% saving)
  • Seventh goes from $7 to $5 (a 28% saving)
  • Eighth goes from $12 to $9 (a 25% saving)
  • Ninth goes from $18 to $15 (a 17% saving)
  • Tenth (the richest) goes from $59 to $49 (a 16% saving – the smallest net gain)

But the men aren’t happy….

The sixth man points out that he only got $1 out of the $20, but the tenth man got $10. The seventh man agrees, also asking why he only got $2 when the tenth man got $10. The first four men are also indignant, saying “we didn’t get anything at all – the new system exploits the poor!”

So the nine men surround the tenth man and beat him up.

The next month, the tenth man doesn’t show up. When it comes to paying the bill, the group of nine men find they don’t have enough money between them to even pay for half the bill.

I suggest you read this again and truly let it sink in.  Yes, the few who pay the highest taxes do tend to benefit from any reductions in the tax rates.  After all its just simple math (and you thought you’d never use maths after school ).

But if we keep attacking the so-called ‘Rich’ we run the risk of them taking their wealth somewhere else.

And importantly, the Australian lifestyle as we know it would simply cease to exist!

“So how does that work?” I hear you say….

Australia’s Progressive Tax System

Ok, let’s break this down a bit…

The concept of a progressive tax system is an interesting one.  But it’s not a simple tax system and it certainly isn’t adopted by many countries around the world.

The progressive tax system is built on the idea that the more you earn, the higher percentage you pay in taxes.  As you earn more, the rate of tax you pay also goes up. 

This means the average percentage tax paid by those on a higher wage is much larger than those on lower wages.

We effectively tip the tax scales in favour of lower incomes.  Lower incomes pay much less, while higher incomes pay much more to compensate what the government needs to run the country.

But is this the ‘fairest’ way to do things?

Is a Flat Rate Tax Fairer?

In places like Hong Kong, for example, they have what is known as a flat tax system (usually around 30%).  You earn a dollar, you pay 30c to the government. 

While someone earning $10k, versus someone earning $100k pays the same percentage, the person on $100k has contributed significantly more to the running of the country.  At 30%, the lower earner has paid $3k in taxes, while the higher earner has paid $30k.

When you see it like this it makes sense.  Earn more, pay more.  But at the same tax rate.

What About a Progressive Tax System?

We have already shown that someone who earns more, pays more in a flat tax system.  It’s just simple basic maths.

But in a progressive tax system we now want those on higher incomes to not just pay more tax, but do it at a higher rate than anyone else.

So, we create tax brackets where you pay a higher percentage of tax as you earn more. 

Increasing Tax Rates

Who Carries Australia’s Tax Burden?

In Australia the top 10% of taxpayers pay 50% of the income tax received by the government.  The top 20% of people pay more than two thirds of all income tax taken.

This tax ‘burden’ that sits across a very small percentage of taxpayers gets worse every year.  This equates to only around 2.5 million people, out of 27 million, who carry the bulk of our income tax bill every year for the whole country.

Someone earning $40k per year only pays 10% average tax, while someone on $100k pays 23% – more than double the tax rate! 

Someone on $200k is paying well over 30% average, when the Medicare levy is included.

Let me state this another way if the penny hasn’t dropped.  The person earning $40k is paying 10c to the government for every dollar they earn (on average).  But the person earning $100k is paying 23c, for every dollar they earn!

It is easy to see that higher income earners are footing the majority of the Australian tax bill, and are paying for the bulk of the lifestyle that we ALL enjoy.

Make the Rich Pay

Why Use a Progressive Tax System?

What is the logic behind a progressive tax system, and why is it ultimately good for Australians overall?

Overall, it allows us to create a higher average standard of living for all Australians.  People on lower incomes can enjoy a lifestyle that is way above their pay grade.

We can also create safety nets for those who are less fortunate in our society. 

Don’t believe me?  Just check out other first world countries and see how they treat low-income earners!  Unfortunately, many wealthier countries (including the US) often leave those struggling on lower incomes way behind.

The Cost of the Australian Lifestyle

To live the lifestyle we enjoy in Australia is expensive!

We are a very low populated country, spread geographically across one of the largest countries in the world.  We are roughly a third the population of the UK, but cover 30 times the land mass.

Providing infrastructure and services to such a widely spread population is very expensive.

Higher Standard of Living

We have a very high minim wage in Australia, currently second highest in the world!  We have accessible education, health care and aged care for all. 

We have a huge network of transport systems and roads, and a world class communications network connecting every Aussie in some manner.

And then there is a very wide, robust financial safety net.  For those doing it tough there are several mechanisms that kick in to help people out. 

Lifestyle in Australia

How Much Does It All Cost?

The Federal Government currently spends around $21k per person per year (around $28k per adult).  That’s how much it costs for us all to enjoy the Australian lifestyle!

How much tax did you pay last year?  Was it anywhere near $28k?

Living in a country like Australia is expensive and living the lifestyle we all enjoy costs a bundle.  So someone has to pay!

You can start to see how we actually need big business and the high-income earners to fund the high standard of living with their tax dollars.

A progressive tax system funds our lifestyle!

Why is a Progressive Tax System Good?

Let’s break this down looking at two points of view; High income and lower income earners.

If you Earn a ‘Higher’ income…

If you earn more than $100k – $150k plus, it is easy to feel completely ripped-off by a progressive tax system.  Here’s the harsh reality;

  • You will pay more tax.
  • You can never claim welfare or social assistance.
  • It doesn’t matter how many children you have, you will need to fund them 100% – no assistance from the government.
  • No government ‘hand-outs’ like the GFC payments, low-income offsets or first child bonus, etc etc.
  • You will need to fund Medicare, even if you don’t go to the doctor – oh and you’ll need to have private health insurance, or you’ll get slugged even more tax levies.

This is the simple reality of earning a higher-than-average wage.  As I tell my high-income friends, just suck it up and get on with it!  Go enjoy another soy latte 😉

You need to realise how fortunate you are to have a higher salary.  Yes, you probably worked your arse off to get it, but you’re here now.  And you have the chance to do some amazing things with it.

Anyone earning over $100k has more than the basics of living covered so you can work on creating true wealth for you and your family.  You can begin to change the lives of those around you for the better.

But even more importantly you are an integral cog in what makes Australia such an amazing place to live.  The extra tax you pay helps create the incredible lifestyle we all enjoy.

Take a moment to consider jobs like nurses, police officers, teachers etc.  These types of jobs are paid through the public purse, so there will never be enough money to pay them what they are truly worth. 

And yet we all get to live in a society where our children receive quality education, we are kept safe and if we fall sick, there is someone there to take care of us.

As a higher income earner, this is where your extra tax goes.  This is why it makes sense, so we can all enjoy the higher quality of life we do in Australia – even if our jobs don’t pay fully what they should.

If you Earn a ‘Lower’ income…

While I know that many people are doing it very tough in some lower wage brackets, but we do need to step back and take a different perspective.

Here in Australia, we enjoy a very high standard of living.  In fact, in most methods of measurement Australia sits inside the top 10 countries for standards of living.

Try not to fall into the ‘tall poppy syndrome’, which is so easy to do in Australia.  It’s so easy to think ‘someone has more than me, so they should give it up so I can have more!’. 

If we simply focused on ourselves, and how we can make the best of the life we have, then we wouldn’t care what others are getting and why.  Believe me, comparison is the thief of happiness!

Comparison is the thief of happiness!

Don’t focus on what others may have, focus on the good things that you already have in your life.  And remember, there is always someone doing worse off than you, who wished they had your lifestyle.

A progressive tax system is like giving low-income earners a ‘head-start’.  While you are earning less, we will take less tax from you, so you can try and get ahead.

If I could leave you with one thing to consider, it would be to practise gratitude.   We should all be grateful to live in this amazing country we call home. 

We should acknowledge that it is being funded through a range of “taxes”, including a large chunk coming from the higher-income earners.  Try not to be jealous or angry at them, but understand they are a necessary part of how our country is funded.

Everyone pays taxes

Final Thoughts

Normally I would ask you to comment and let me know what you think.  But I can already guess that if you earn more, you think a progressive tax system sucks, and if you earn less, you think the ‘Rich’ still have it easy!

I personally like the idea of a progressive tax system, as I do believe we should give those doing it tougher a hand-up.  We should create safety nets for those less fortunate, and we should aim for a high standard of living for all.

But I also think that it’s too aggressive in Australia.  Not only does this dampen the Australian spirit to drive to achieve more.  But it also makes for a very fragile system of funding the country.

In Australia we have too much reliance on income tax to fund government.  Then on top, we have way too much reliance on a small number of taxpayers to fund the bulk of the income tax. 

This is both fragile and not sustainable over the longer term.  And ironically this is what the original staged tax reforms was starting to address – but now that’s all gone.

So for now, let me leave you with this;

  • To my high-income friends – stop whinging and enjoy the fruits of your efforts.  Use it to build true wealth!
  • To my lower-earning friends – also, stop whinging!  You are living a lifestyle that is amazing in Australia, which is being partly funded by others.   Be grateful and work hard on yourself to build your future wealth.

Oh, and yes I would still love to know your thoughts on what is a device topic!

Until next time!


Steve Sig

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Hi, I’m Steve Floyd….creator of my own ideal lifestyle and family guy.

I started Steve’s Blog to share the things I have learnt (and continue to learn), building my own ideal lifestyle.   After a successful career in IT, Sales & Marketing, and self-taught investing and money management, I managed to retire at the ripe young age of 50. 

Now I enjoy helping others break free from the typical 9 to 5 grind, and find their own ideal Lifestyle! And when I’m not blogging (or with the family), I’m at the gym, looking for the best cup of coffee, watching Aussie rules footy or on the Playstation!


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