Line yet to be drawn on deficit levy

A week out from the Federal Budget, the Government is still working out who will pay the deficit levy and how it will be done.

But after toying with having it kick in at $80,000 - in line with the 37 cent tax bracket - the Government is looking at having it start at a higher threshold of about $150,000 for families.

This is in part because of the widespread angst in coalition ranks about some families being potentially hit by a "double-whammy" of lower welfare payments and higher taxes.

As part of Treasurer Joe Hockey's first Budget on Tuesday, the Government is aiming to phase out government handouts where families have combined incomes of $100,000, or about $12,000 less than the cut-off for a family with two children under 13.

If families on $100,000 lost Family Tax Benefit Part A and were hit by a one per cent deficit levy on income of more than $80,000, they would be up to $4050 a year worse off.

This is thought "unsellable" by Liberal MPs already angered by the prospect of having to defend Prime Minister Tony Abbott's broken promise not to introduce any more taxes.

A senior Government source said it would be much "cleaner" if the deficit levy was kept in line with tax brackets. If the $80,000 bracket was ruled politically unviable, the next option would be to lift it to $180,000, but this would catch only 3 per cent of taxpayers.

To ensure at least some of the 15 per cent of taxpayers on incomes of between $80,000 and $180,000 pay the deficit levy, the Government is also considering adopting elements of the schedule used for the Medicare levy surcharge.

Under the surcharge, individuals who are not privately insured pay one per cent extra tax on incomes of more than $88,000, 1.25 per cent extra for those between $102,001 and $136,000 and 1.5 per cent if on more than $136,000.

Mr Abbott acknowledged many people would be "disappointed" by the Budget but said they would eventually be grateful for the Government doing what was "necessary".