The Government’s tax package is unfair to low paid workers. In response, the Labor Opposition has just announced that it will support Stage 1 of the package, within which is embeded much of that unfairness. How might we reduce the unfairness?
The current debate about the Government’s tax package introduced in its April 2019 Budget includes issues about prudential budgetary management and fairness across the income levels affected by its various proposals. Fairness alone is sufficient grounds for its rejection.
The unfairness of the package is most evident in the treatment of low paid workers, such as the cleaner of the lowest minimum award rate in the Cleaning Services Award, who do not receive a Living Wage. Yet in a perplexing decision the Labor Opposition has just announced that it will support that part of the package which includes provisions that prejudice the lowest paid workers.
A three stage package in two parts
The proposed tax package is an extension of the three-stage tax changes out to 2024-25 that were enacted following the May 2018 Budget, with effect in the 2018-19 tax year. It is proposed that the further changes to the first stage would have retrospective effect for 2018-19.
Both the enacted and the proposed changes would greatly advantage high income Australians and effectively penalise the lowest paid Australian workers.
The distinction between the enacted tax cuts and the now proposed additions to the Low and Middle Income Tax Offset (LMITO), which was introduced in 2018, is not well understood. It is sometime suggested that the increases now proposed for low and middle income taxpayers are between $255 and $1,080 for workers on up to $90,000 a year. In fact, the additions proposed in the April 2019 Budget are between $55 and $550 a year. If enacted, the combined cuts will be $255 at $37,000 rising to $1,080 over the range 48,000 to $90,000, before reducing towards zero.
The impact on the cleaner
From the perspective of the cleaner on the lowest award rate in the Cleaning Services Award both the 2018 changes and the changes now proposed are unfair. The lowest award rate for a cleaner throughout 2018-19 has been $768.10 a week or $40,079 over the year. The National Minimum Wage has been $719.20 a week or $37,528over the year.
Cleaners and other workers on these wage rates, along with those who are not able to obtain full time and regular work, are the working poor in Australia.
These low paid full time workers are also in the transition zone where their total Stage 1 2018-19 tax cuts can be as little as $200 for the year, or $255 if the further increases are enacted. At the lowest rate for the cleaner, the tax cut will be $292 or $486 if the further increases are enacted.
The Government’s online Tax relief estimator shows the tax payable at each dollar level of income over the three stages of the package when compared to the 2017-18 tax scale.
At the cleaner’s 2018-19 wage rate, the tax cut would be $486 in 2018-19, rising to $588 in 2022-23 (Stage 2), with nothing more at Stage 3 in 2024-25. These figures and all that follow take into account the Medicare levy.
For the taxpayer on $200,000 a year, the combination of enacted and proposed changes will deliver a tax cut of $135 in 2018-19, rising to $2,565 by 2022-23, which will rise to $11,640 in 2024-25.
The higher paid taxpayer will have almost five times the annual taxable income of the cleaner, but receive almost 20 times the tax cuts of the cleaner.
It is important to understand that the estimates tax payable and tax cuts each income level are static and do not estimate the tax payable and the tax cuts as income grow over the years. We have to make an estimate of increases in taxable income out to 2024-25 to estimate the total impact of the changes.
The prospective benefits from the tax package have to take into account future increases in income and bracket creep. Bracket creep occurs when a greater proportion of a person’s income falls into a higher tax bracket. It can happen even without the taxpayer moving into a higher tax bracket.
Compared to 2017-18, by 2024-25 the cleaner will pay a greater percentage of his or her income in tax while high income earners will pay a lower percentage of their income in tax.
This can be illustrated by assuming the incomes of both cohorts increase by 20% over the seven years and using the Tax relief estimator to find the tax payable on that income in 2024-25. The cleaner’s taxable income would increase to $46,468 a year and the overall tax rate would increase from 11.6% to 13.3%. By contrast, the taxpayer on earnings rising to $200,000 (from $166,667) will see his or her overall tax rate fall from 31.6% to 27.8% over the seven years. At this time both would be in the same marginal tax bracket: $41,001 to $200,000 with the marginal tax rate of 30% (down from 32.5% under the enacted changes).
We can calculate the cleaner’s loss in 2024-25 by applying the overall tax rate for 2017-18 to the expected income and tax rate in 2014-25. The 1.7% increase in tax payable by the cleaner equates to a loss on account of bracket creep of $790 in 2024-25. The 3.8% cut in the tax paid by the high income earner in 2024-25 equates to an annual gain of $7,600, despite suffering bracket creep.
Bracket creep will be greater for those at the lower end of a tax bracket because a higher percentage of their income will be falling within a higher tax bracket. The wider the tax bracket, the greater will be the differential impact. These comparisons highlight the inherent unfairness of a single tax bracket (legislated in 2018) covering workers who are not paid a Living Wage and those who have an income that is more than four times greater.
The importance of tax cuts to low paid workers
Since the comprehensive income tax changes of 2000-01 that accompanied the introduction of the GST, low paid minimum wage-dependent workers have relied on targeted tax cuts to partially offset the decline in the relative value of their wage rates. In the period November 2000 to November 2018 Average Weekly Ordinary Time Earnings increased by 100.9% (from $798.80 to $1,604.90 per week) while from 2000-01 to 2018-9 the cleaner’s rate increased by 74.8%. Most of the loss was suffered in the first decade.
Following the last Labor Budget in May 2012, in 2012-13 the average tax rate for a cleaner was 9.0%, which should be notionally increased to 9.5% to take into account the increase in the Medicare levy in July 2014. Bracket creep lifted that figure to 11.6% by 2017-18, a loss that should be added to the loss from 2017-18 to 2024-25.
Over the twelve years from 2012-13 the cleaner will see his or her tax liability rise from 9.5% to 13.3% if there is a 20% increase in the minimum wage rate between 2017-18 and 2024-25. It would equate to a loss of $1,745 in 2024-25 compared to the tax rate in 2012-13.
These changes will continue to impact on minimum wage setting. Minimum wages will continue to have more work to do and/or minimum wage increases will continue to be less effective in maintaining and improving living standards. Locking in increases and tax rates to 2024-25 precludes any meaningful tax/wage trade-off in the medium term.
Middle and higher income taxpayers
A taxpayer on Average Weekly Ordinary Time Earnings over the period 2000-01 to 2017-18 saw tax increase from 22.8% to 24.2%. By 2024-25 (also assuming an increase of 20% over the last seven years) the percentage will fall to 23.4%, slightly more than 2000-01. By contrast, a taxpayer on double Average Weekly Ordinary Time Earnings saw a reduction from 33.4% to 31.4% over the first 17 years, with a further reduction to 27.7% in 2024-25 if he or she also has a 20% increase in income. The contrast between middle income and high income taxpayers is marked, but it is the subject of little public comment.
The cleaner, like other low paid workers who are not paid a Living Wage, would get crumbs out of the proposed increases under the 2019 Budget, which would soon be lost through bracket creep. For the cleaner, the proposed change in the LMITO would only add $192 a year, or less than $4.00 per week, to the 2018 tax cuts. For the worker on $37,000 a year or less, the proposed increase is a mere $55 a year. A fairer Stage 1, although less than adequate in the context of all three stages, would be to have the full LMITO paid at $37,000 a year, which is just under the National Minimum Wage rate for 2018-19, with a long taper below that rate, and consequential changes when LITMO is abolished in 2022-23.
The Labor Opposition has announced that it will support the Stage 1 proposals, seek the bringing forward of Stage 2 and oppose Stage 3. It is unclear whether it has overlooked the lowest paid workers in the country or feels that, politically, it must take the whole Stage 1 proposal despite its flaws. Its reference point for the tax treatment of low paid working Australians should be the policy and outcome of the last Labor Budget in May 2012. Its current position would lock in disadvantage for the low paid.
If the Opposition is not pressing the interests of the lowest paid, the Government will not make any changes. The Government says it will not split the package, but it likely to consider some amendments that will ensure sufficient votes in the Senate for all three stages. The position of the lowest paid is an issue that the cross bench senators might take up in their negotiations with the Government.
Brian Lawrence LL.B. M.Ec. appeared in the Fair Work Commission’s Annual Wage Review 2018-19 on behalf of the Australian Catholic Bishops Conference. He has prepared submissions and appeared on behalf of agencies of the Catholic Church in annual wage reviews since 2003.