Try this: Treasury's Income Explorer shows effective marginal tax rates

A new Treasury Analytical Note by Meghan Stephens, Yvonne Wang, and Liam Barnes presents data on effective marginal tax rates for different families (more on that in a moment). However, one cool thing that the note points to is Treasury's Income Explorer tool, which allows you to graph effective marginal tax rates (EMTRs) based on different historical tax schedules (from 2014 to 2024, and forecast tax schedules for 2025 to 2028. You choose the taxpayer's hourly wage, whether they are partnered (and the partner's work hours and pay rate), the number of children, and whether they are a homeowner or renting (which affects their eligibility for the accommodation supplement). This allows you to look at EMTRs for a whole variety of taxpayers in different situations.

As a quick reminder, the effective marginal tax rate for a taxpayer is the proportion of the next dollar earned that is lost to taxation and to decreases in government transfers, rebates, or subsidies. These rates can get quite high - sometimes over 100 percent (in which case, the taxpayer would be worse off in net terms by earning another dollar). As an example of a high EMTR, consider this graph (made in the Income Explorer tool) based on a single parent (with two children aged 0 and 2) earning $40 per hour in their job, and paying weekly rent of $450:

Notice that the EMTR varies depending on the number of hours worked (shown along the top x-axis) and annual income (shown along the bottom x-axis). There are points in the distribution where EMTRs are low, but others where EMTR is very high. And for this taxpayer, working between 38 and 42 hours leads to an EMTR that is 107.6 percent. The Income Explorer tool even breaks that EMTR down: it is made up of 34.6 percent wage tax (including ACC levies), 27 percent Working for Families abatement, 21 percent Best Start abatement, and 25 percent accommodation supplement abatement. Notice that most of the EMTR (73 percentages points out of 107.6) is made up of reductions in entitlements to government assistance for that taxpayer. This would clearly affect the incentives to work additional hours (at least, between 38 and 42 hours).

Fortunately, the results are not so bad across the board. Stephens et al. show that less than six percent of all taxpayers have EMTRs greater than 50 percent, as summarised in this table:

The majority face an EMTR between 25 percent and 50 percent, and for most people, their EMTR is equal to their marginal income tax rate (plus ACC levies).

Understanding EMTRs is important for understanding the incentive effects of the tax and transfer system. Treasury's Income Explorer is a great tool for visualising EMTRs (as well as replacement rates, participation tax rates, and other complementary measures). Try it out for yourself!

[HT: Les Oxley for the analytical note]