Population ageing, taxation, pensions and health costs, CHERE Working Paper 2007/10

personal income is combined with the Low Income Tax Offset (LITO). The LITO has
the effect of raising the zero rated threshold of the personal income tax rate schedule
from $6000 to $10,000 and the MTR on income from $25,001 to $40,000 from 30
cents to 34 cents in the dollar. ¹⁰ Because the tax base is still individual income and
the partners in the H2 household earn the same incomes, the graph shows a single
MTR profile for both partners in the H2 household.

Figure 1a MTR schedule + LITO

Figure 1b ATRs: MTR schedule + LITO

------ ATRH H1 --------- ATR2 H2

— ATRH H2

Figure 1b plots the ATR profile. Again, there is a single profile because the tax base
is individual income. Note, however, that both members of the H2 household pay tax,
and so at any given level of primary income, the household pays twice as much tax as

¹⁰ The LITO is in fact an entirely redundant policy instrument that serves only to reduce the
transparency of the true MTR schedule, with a rate of 34 cents in the dollar on incomes from $25,001
to $40,000, depicted in Figure 1.

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