Effective marginal tax rates and HELP threshold reform

Media reports in the last few days have pointed out that some women face effective marginal tax rates above 100% under proposed changes to the HELP thresholds. But this is not new – the nature of the HELP repayment system is that for every HELP debtor, male or female, there are income zones that reduce take-home pay.

This is because as income reaches each threshold the debtor must repay a percentage of his or her entire income. Under the current thresholds, a debtor earning $54,868 in 2016-17 will repay nothing. But someone earning $54,869 will repay nearly $2,200. So up to an income of about $57,000 HELP repayments mean the debtor takes home less money than if he or she earned $54,868.

Of course, in most cases the debtor’s long-term financial position is not worse as their HELP debt is reduced. In this sense, HELP repayments are different from the welfare benefit phase-outs that normally contribute to high effective marginal tax rates – for the debtor, that is money lost to consolidated revenue, rather than improving their personal balance sheet. But for people concerned with immediate cash flow more than their long-term financial position, HELP repayments can cause problems.

Research by Richard Highfield and Neil Warren shows that HELP debtors manipulate their taxable income to avoid or delay repayment. They also make the point that this is costly for income tax revenues, even if the HELP debt is eventually repaid.

One way to minimise problems for both debtors and tax revenues would be to adopt the system used by England and New Zealand, where debtors repay nine per cent and twelve per cent respectively of marginal income above the threshold. While this still substantially increases marginal tax rates, it does not of itself mean that the debtor takes home less by earning more.

While the English and NZ systems have merit, a strength of the current Australian system is that anyone consistently earning the threshold or more is likely to repay all their HELP debt. In the other systems, nine or twelve per cent of an amount just above the threshold will only lead to low repayment amounts and the debtor will not fully repay if they stay permanently on that income.

The government’s HELP threshold proposals are another way of dealing with the effective marginal tax rate issue. By proposing an initial threshold of one per cent of income, moving up in 0.5 per cent increments to 10 per cent, they don’t eliminate the income zones that reduce take-home pay, but they do make them much smaller at the initial threshold and keep them small at each increment. They therefore reduce the incentive to manipulate income to avoid repayment or turn down offers of extra work.

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