A person with a taxable income of $40,000 this year earns a net income of $36,113. When the offset ends next financial year,their net income will fall to $35,633.
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There are even larger hits for people on much lower incomes who have been supported by the government's coronavirus supplement which is due to end just after Christmas because of the way the tax and welfare systems interact.
The Bankwest Curtin centre found a person earning $15,000 faces an effective tax rate of 80.6 per cent for every extra dollar they earn. This year their effective marginal rate is still 60.8 per cent.
A person on $25,000 will face an effective marginal tax rate of 68.4 per cent compared to 47 per cent for a person earning $180,000 a year.
The issue of effective marginal tax rates is of growing concern with many people,largely women,finding that if they work four or five days a week much of that income is eaten up covering childcare fees.
Treasurer Josh Frydenberg will deliver his next budget in May,giving him the option of dealing with the tax hit facing so many low and middle income earners. But any fix will be expensive.
Analysis by the Parliamentary Budget Office shows it would cost between $7 billion and $8 billion for every year the low and middle income tax offset is maintained.
Mr Frydenberg said once the third tranche of the government's tax plan is in place in 2024-25,which will include replacing the 37 and 32.5 per cent tax rates,95 per cent of people will face a marginal tax rate of no more than 30 per cent.
"The low and middle income tax offset was due to be removed with the commencement of stage two of our plan,but the one-off additional benefit in 2020-21 will provide support to households and boost to the economy during the recovery,"he said.
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But shadow treasurer Jim Chalmers said the end of the low and middle income tax offset occurred at the same time as the government planned to sharply cut spending even as it expected unemployment to remain elevated.
He said Prime Minister Scott Morrison would get a large,ongoing tax cut while low and middle income earners would receive small and temporary tax relief.
"Once again Scott Morrison and Josh Frydenberg aren't being upfront with Australians about the real effects of their changes to the tax system,"he said.
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