Why tax brackets matter more than you think: the progressive versus regressive divide that shapes who pays

Australia's tax system is not a single thing. It is a layered structure of different taxes pulling in different directions, some placing heavier burdens on higher earners and some doing the exact opposite. The gap between those two categories is not a technical accounting matter. It is a decision about who funds government, and it shapes wealth outcomes over a lifetime in ways most people never think to trace.

Progressive and regressive are mechanics, not opinions

The language of progressive and regressive sounds ideological, but the underlying mechanics are empirical. A tax is progressive when the effective rate rises with income — when you pay not just more in dollar terms as you earn more, but a higher proportion of each dollar. A tax is regressive when the effective rate falls as income rises — when the dollars paid are the same for everyone, but represent a larger slice of a smaller pie.

Australia's personal income tax is genuinely progressive. The bracket structure means a person earning $45,000 pays a marginal rate of 16 per cent on income above $18,200, while someone earning $250,000 pays 45 cents in the dollar on income above $190,000. In practice, the average effective rate is considerably lower than the marginal rate for both, because the lower brackets apply to the same first slice of income for everyone. But the direction is clear and the gap is real.

The GST's regressivity is a design choice, not an accident

The GST is the counterweight. At ten per cent on most goods and services, it collects the same rate from every buyer. But a household spending $40,000 a year on consumption is paying that rate on a far larger share of its total income than a household spending $100,000. The rate is flat; the burden is regressive. A Parliamentary Budget Office analysis of proposals to raise the GST from ten to fifteen per cent found that progressive design features, such as exempting food, health and education, or supplementing low-income households directly, could substantially change who bears the additional load. The point is that the regressivity of consumption taxes is not fixed. It is a design choice.

The same logic applies further down the tax stack. Fuel excise is a flat cents-per-litre charge. A tradie driving a ute to three job sites a day pays the same tax per litre as the surgeon driving a luxury SUV to one. But fuel represents a much larger proportion of the tradie's weekly budget. Energy costs work the same way. Policies that raise energy prices through levies or slow-rolling supply constraints impose what researchers in this space call a regressive burden: lower-income households spend a higher proportion of their income on energy and are least able to absorb the cost or invest in offsets like rooftop solar. The structural consequence is that cost-of-living pressures tend to bite hardest at the bottom of the income ladder, not because of any deliberate design, but because the tax and levy architecture was not built with the distributional effect in mind.

The design of trust taxation is, at bottom, a question about whether the progressive income tax structure actually applies to those with the means to restructure around it.

High marginal rates create incentives to escape them

The incentive side of the equation is equally consequential. High marginal rates on earned income reduce the return to additional work near the top of the income scale. Whether that actually reduces work effort is contested in the empirical literature. What is less contested is that high marginal rates create stronger incentives to shift income into structures that are taxed differently. Discretionary trusts are one example: by distributing income to lower-taxed beneficiaries, they effectively compress the bracket structure for those who can access them. As The Bearing has examined, a proposed minimum thirty per cent tax on trust distributions would close the most significant planning advantage available to asset-holding households. The design of trust taxation is, at bottom, a question about whether the progressive income tax structure actually applies to those with the means to restructure around it.

Property concessions embed regressive features inside a progressive system

Property sits at the far end of that logic. Negative gearing and the capital gains discount create an effective rate on investment property income and gains that is structurally lower than the rate on equivalent wage income. The benefit flows disproportionately to higher-income earners who both have capital to invest and face the highest marginal rates on wages, making the differential most valuable to them. That is not a neutral outcome. It is a regressive feature embedded inside a nominally progressive system.

What this means in practice is that the headline progressivity of Australian income tax is real but partial. It operates against a backdrop of regressive consumption taxes, regressive energy and excise levies, and concessions on capital that are most valuable to those who need them least. The question of who actually bears the burden of funding government cannot be answered by looking at the income tax schedule alone. It requires following every tax through to who actually pays it, as a proportion of what they actually have, and adding up the total. That sum is harder to calculate than a bracket rate, but it is the only number that tells you something true.

Sources

The Bearing — Raising the GST from 10% to 15% is better for…

The Bearing — Here's how trusts work. And here's why the tax man wants a bigger slice

The Bearing — Negative gearing and CGT discounts reshape who can afford property

The Bearing — Politics at the Fuel Pump: New Legislation Every Month

Frequently Asked Questions

What is the difference between a progressive and regressive tax?
A progressive tax takes a higher proportion of income as earnings rise — Australia's income tax works this way. A regressive tax takes a higher proportion from lower earners, even if the dollar amount or rate is the same for everyone, because that amount represents a larger share of a smaller income.

Is the GST regressive in Australia?
Yes. Because the GST applies at a flat ten per cent rate, a lower-income household spending most of its earnings on consumption pays the tax on a far larger share of its income than a wealthier household does. That regressivity is not fixed — exemptions and targeted transfers can reduce it, but only if they are deliberately designed in.

How do trusts reduce the amount of tax wealthy Australians pay?
Discretionary trusts allow income to be distributed to beneficiaries who are taxed at lower marginal rates, effectively compressing the bracket structure for those with access to them. A proposed minimum thirty per cent tax on trust distributions would close the most significant advantage this creates relative to ordinary wage earners.

Why do negative gearing and the capital gains discount mainly benefit high-income earners?
Both concessions are most valuable to people who face the highest marginal tax rates on wages, because the differential between the concessional rate and their ordinary rate is largest. Higher-income earners are also more likely to hold investment properties in the first place, concentrating the benefit further up the income scale.

Does Australia's overall tax system favour high or low income earners?
Neither cleanly. The income tax is genuinely progressive, but it operates alongside regressive consumption taxes, flat excise levies, and capital concessions that are most valuable to wealthier households. The net burden on any household depends on the balance of those forces, and that balance is shaped by policy choices that are rarely presented as distributional decisions.