It’s on PM to make tax cuts fair

Jan 25, 2024
Finance and Wealth, Australian Currency and Calculator

Anthony Albanese risks being the man who did what Scott Morrison couldn’t – easing the tax burden of the rich.

I have no inside info on whether Anthony Albanese will stick to his oft-repeated promise to deliver the stage 3 tax cuts intact on July 1, or change them in some way because the cost-ofliving crisis means all bets are off.

I don’t even know that the measures he’ll discuss at the meeting of Labor’s caucus today will be the last word on what we’ll see in the May budget, or on our payslips after July 1.

I’m paid to say what I think should happen, not to predict what will. So I can tell you this: if Albanese doesn’t initiate belated changes to make the tax cuts fairer and of greater benefit to those who’ve suffered most from the cost of living, it will show he’s lost touch with good policy, Labor’s professed values and even what’s needed to protect his political hide.

Let’s start from first principles. The longstanding view that our system of taxes and benefits should require those who can best afford it to bear more of the cost of government than those who can least afford it rests on two key policies: a largely means-tested system of government pensions and benefits, and a ‘‘progressive’’ scale of income tax.

Your income is taxed in slices. The first slice is untaxed, then the rate of tax on subsequent slices gets progressively higher. When you add the slices together, the average rate of tax you pay on the whole of your income is far higher for people on very high incomes than for those on modest incomes.

As legislated, the stage 3 tax cut would make three changes to the tax scale. It would reduce the rate of tax on the slice of income running from $45,000 a year to $120,000 a year from 32.5¢ in the dollar to 30¢.

Then it would reduce the rate of tax on the slice running from $120,000 to $180,000 from 37¢ in the dollar to 30c.

Finally, it would cut the rate of tax on the slice of income running from $180,000 to $200,000 from 45c in the dollar to 30¢. Only the last slice of income, anything above $200,000 a year, would continue to be taxed at the top rate, unchanged at 45c in the dollar.

Do you see how this would significantly reduce the progressivity of the tax scale? That’s just what Scott Morrison, as treasurer and then prime minister, wanted: to shift the burden of taxation away from high income earners and on to everyone lower down.

It’s the sort of policy you might expect from a Liberal government, but one Labor has always claimed to oppose. It initially opposed stage 3, but later changed to quietly supporting it, for fear of being branded as high-taxing by its opponents.

If Albanese doesn’t seize this chance to make the tax cuts fairer, he’ll be remembered as the prime minister who struck the greatest blow in cutting taxes for the rich. The man who did what ScoMo couldn’t.

Albanese has claimed that stage 3 will deliver tax cuts for everyone earning more than $45,000 a year. That’s true. Someone on $50,000 will have their average rate of tax reduced by 0.25¢ in the dollar, yielding a saving of $2.40 a week. Wow.

To get a weekly saving of more than $20 a week – not a lot if you’re struggling with much higher rent or mortgage interest rates – you have to be earning more than $90,000.

Only if your income is $120,000 will your average rate of tax be cut by 1.6¢ in the dollar, saving you $36 a week. At $180,000, your average rate falls by 3.4¢ in the dollar, saving you $117 a week. Not bad. But if you’re struggling on $200,000, your average tax rate falls by 4.5¢ in the dollar, and you save almost $175 a week.

According to calculations prepared by the Parliamentary Budget Office for the Greens, as they stand, the stage 3 cuts will cost the budget almost $21 billion a year.

Of that, people earning less than $45,000 a year get nothing, and those earning between $45,000 and $60,000 would get less than 2 per cent of the benefit.

The large number of people earning between $120,000 and $180,000 would get about 30 per cent of the benefit, while the relatively small number earning more than $180,000 get 44 per cent.

It’s been said by some that rejigging the tax cuts so that more of the money went to the low- and middle-income earners hit the hardest by the cost of living – and bracket creep – would be inflationary because they’d spend more of any tax cut than would the well-off.

True, but not a good enough reason to distort the tax system and keep beating ordinary families into the ground.

As it stands, stage 3 hugely benefits a minority of voters, most of whom are unlikely to vote Labor. If Albo can’t convince most voters he broke his promise because they needed a break, he ought to get out of politics.

Ross Gittins is the economics editor.


First published by The Sydney Morning Herald January 24, 2024

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