Why do we need a separate Medicare levy in Australia? It all goes into the same pool of funds anyway. So why bother?
Medicare Levy
We had assumed that the Medicare levy goes into a separate pool. But then we read Bob Deutsch’s preamble in Tax Vine – the monthly newsletter by The Tax Institute – and learned that it doesn’t.
In this episode Bob Deutsch, the Senior Tax Counsel of The Tax Institute, will elaborate on all this. Here is what we learned.
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Misleading
Segregating the Medicare levy from income tax is misleading. It gives the impression that there is a separate pool of funds that is available for the federal government to finance Medicare. But there is no separate pool.
Complexity
Calculating the Medicare levy separately from income tax fundamentally adds to the complexity of the Australian tax system. We impose different criteria in respect of its application with different brackets and exemptions. All this makes it a lot more complicated, but for what? It all goes into the same pot after all.
Solution
We would simplify our tax system significantly if we completely abolished the Medicare levy. Just having one overall income tax would make things a lot simpler.
Medicare Levy Surcharge
The Medicare Levy Surcharge is to incentivise higher paid individuals to take up private health insurance. But we should still consider moving it into the overall income tax charge. Our tax system would become so much more straight forward.
Honesty
All this would result in a much more open and honest approach. We would then finally concede that our real top marginal tax rate is 47% not 45%. And it would show that the opposition’s proposed real top tax rate would be 49% rather than 47%. In addition, we would simplify the system.
So this is our take-away from this episode. But please listen to the actual interview. Bob outlines his thinking much better than we ever could.
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