Labor has unfinished business on tax – Its 2024 tax cuts have failed low-paid workers

Jan 30, 2025
Close-Up Of Taxes Text With Scissors Over White Background

In his address to the National Press Club on 24 January 2025, Prime Minister Albanese reflected on his Government’s decision announced a year earlier to change “the tax plan we inherited from the Morrison Government to make it better and fairer”. It is likely to be a major selling point in the coming Federal election.

But changes that made the income tax system fairer than those established under the Morrison Government did not make them fair.

Certainly, there were substantial benefits for the low-income workers in Labor’s 2024 changes, but the real targets for tax cuts were middle income workers, which was confirmed by the Treasurer, Dr Jim Chalmers, who said “We are returning bracket creep where it matters most and where it hurts the most, which is in middle Australia”.

The premise was contentious, and the outcome was much to the disadvantage of low-income working Australians.

Falling living standards

Polls show that the many people are struggling with cost-of-living pressures and that they feel that they are worse off than they were a few years ago.

We have known since late 2019 when the Morrison Government’s three-stage income tax legislation was introduced that we would finish up with Stage 3 coming into operation on 1 July 2024; and we knew then that the package was loaded in favour of high-income taxpayers.

The legislation combined short-term tax cuts for low and lower-middle income taxpayers with long-term tax cuts for high-income taxpayers.

The short-term tax cuts for lower income taxpayers were delivered through a newly introduced Low and Middle Income Tax Offset (LMITO). At $50,000 per year, it was worth $33.54 per week. Importantly, the LMITO offsets were legislated to expire in June 2022.

For longer than that it has been a struggle for many workers to maintain the real value of their wages. In the three years to June 2024, inflation, as measured by the Consumer Price Index (CPI), increased by 16.8%. In the three years to May 2024 Average Weekly Ordinary Time Earnings for full-time adults increased by only 10.9%.

From July 2024, Labor’s tax reforms have delivered to, for example, the worker on $50,000 per year, a tax cut of $929 per year or $17.80 per week, much more than the planned and legislated Morrison Government tax cut of $125 per year at this income.

If our worker now on $50,000 had received wage increases totalling 16.8%, the rate of inflation, over the three years to 2024-25, the tax on the 2021-22 wage ($42,808) would then have been 9.3%. In 2024-25, and after Labor’s tax cuts starting from 1 July 2024, this worker has a tax rate of 13.1%. For net income to match the rate of inflation it would need to increase by an extra $1,702 or $32.62 per week.

In Figure 1 we see the extent and the depth of the real wage cut over the past three years by reference to the CPI increase. The underlying calculations of this and the following graphs are mine and are available on my personal Substack. Middle income workers have been favoured, as the Treasurer promised.

Image: Supplied

The most advantaged worker in this range of incomes is the worker on $150,000 per year, whose tax has increased by 13.3%, substantially less than the rate of inflation of 16.8%. The net wage has increased by 18.1%. The cut in tax is $1,220 per year or $28.38 per week, compared to the after-tax real wage cut of $32.62 per week for the worker on one-third the income.

Part time workers

In Figure 2 are the changes in taxation for lower paid workers. These are part-time workers, and a high proportion would be on low hourly rates. The worker now on $30,000, for example, pays tax of 5.3%, whereas in 2021-22 the tax rate was only 1.1%. For that worker, tax has increased from $279 per year to $1,588 per year: by 381.8%, on a wage that has increased by only 16.8%.

Image: Supplied

Longer-term tax impacts

In a Substack posting on 22 January 2025 I did a similar analysis of these kinds of taxation changes from 2013-14 to 2024-25. The outcomes over those 11 years are close to those described here, partly because the LMITO payments, while they were in operation, had largely restored the position of low-income workers at around 2013-14.

The longer-term tax impact is illustrated by the position of the worker who is now on $50,000 and who has had wage increases equal to the CPI increase of 35.0% to June 2024. In 2013-14 the income tax payable was 10.0%. In 2024-25, following the tax cuts introduced in July 2024, the income tax on $50,000 is 13.1%. Net income has risen by 30.4%, substantially less than the CPI increase of 35.0% over this period. This large increase in the tax bite equates to $29.47 per week even after Labor’s July 2024 tax cuts.

By comparison, middle-income earners have done well over the 11 years, as we see in Figure 3.

Image: Supplied

Conclusion

Even those with a little more than passing knowledge of these matters knew in 2019 when the Morrison Government’s tax package was being debated that there would be a substantial cut in the living standards of low-income workers following the ending of the LMITO payments in June 2022. It was well-known to the Labor Government when it took office in May 2022, but its response was uncertain, delayed, and then insufficient.

The fact of the matter is that, even after the tax cuts of July 2024, low-paid workers are worse off than they were when Labor was elected in May 2022. On the other hand, middle-income workers have been advantaged by Labor’s taxation changes and high-income workers have had better outcomes than the lowest paid workers.

I argue in my Substack post that Labor can, and should, break free of that constraint by making incremental changes to the Low Income Tax Offset (LITO). That is the way forward, but it won’t happen while there is no discussion about how Labor can address the current very real concerns about living standards.

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