How would lifetime income tax work in Australia in theory and practice?

Over a lifetime, the net rate of personal income tax paid by an Australian will vary relative to their lifetime income according to: the level of income (the income tax is generally progressive, so average rates increase with income); the source of the income (income derived from different sources attract different tax treatment, or are exempt from tax entirely); and also by the timing of when the income is received. This latter fact, a consequence of a progressive income tax that is assessed annually, means there is a so-called 'fluctuation penalty' for income earned in lumpy amounts relative to a taxpayer earning the same amount in a smooth manner. Over the years, various measures have been proposed and implemented to mitigate this perceived violation of lifetime horizontal equity. This presentation will review the history of such policies and proposals, the practical and theoretical arguments for and against multi-year or lifetime income averaging, and present estimates of the size and prevalence of the fluctuation penalty in Australia using panel survey data.

Matthew Smith is a third year PhD scholar at the Crawford School as a Sir Roland Wilson scholar. Matt is a Director at the Treasury and has been a member of the public service since 2009. His work has primarily focused on policy analysis on Australia’s tax and transfer system including revenue forecasting and costing and distributional analysis of tax and transfer policies using microsimulation modelling.