Labor’s rejigged Stage 3 tax cuts benefit 84% of taxpayers

Feb 3, 2024
Scissors-cutting-word-TAX 3D Image: iStock / djmilic

After due consideration of the main criticisms, the Labor Government’s rejigged Stage 3 tax cuts seem to be a good way of responding to the cost of living crisis without adding to the Budget deficit and inflation.

The details of Labor’s redesigned Stage 3 tax cuts are now well known. What seems to have received less publicity is how much they benefit low and middle income earners.

Taxpayers in the lowest income quintile received no benefit from Morrison’s version of the Stage 3 tax cuts, whereas under Labor their after-tax income will rise by 1.3 per cent. While a person on an average income will benefit from an increase in their after-tax income of almost 2 per cent, or more than double the amount that they would have received under Morrison’s plan.

Similarly, a family on the average household income of around $130,000 will get $1600 more than under Morrison’s plan, or 2½ times as big a tax cut.
Altogether 84 per cent of taxpayers are expected to gain from Labor’s changes.

While those who will lose have an income at least twice that of the average taxpayer. So they are hardly needy, and almost all of them will still experience a substantial increase in their after-tax income equivalent to between 1 and 2 per cent.

Nevertheless, there have been a number of criticisms of Labor’s income tax changes which will be considered further below.

A broken promise
The Opposition doesn’t really know whether it is for or against Labor’s new Stage 3 tax cuts and has instead concentrated on denouncing what it describes as a “broken promise”, saying that the Government cannot be trusted.

No doubt, Labor anticipated this charge and argued that circumstances have changed since the original Stage 3 tax cuts were announced five years ago.

As Labor points out, and supported by the Treasury advice, the global economy has been impacted by several global shocks, such as the Covid pandemic and global conflicts which has led to a rapid rise in inflation. As a result, the cost of living has increased dramatically, and people are looking to government for more assistance.

Changing the Morrison Government’s tax cuts, which have already been budgeted for, in favour of lower and middle income families is the only way to help these families without increasing the budget deficit and thus adding to inflation. The alternative of leaving the Morrison Government’s Stage 3 tax cuts unchanged would have meant that any other assistance to low and middle income families would have come at a cost to the budget, and thus risk increasing inflation.

But even if circumstances had not changed many of us have argued that the original Stage 3 tax cuts were deeply flawed and wanted them changed from the outset. They were heavily biased in favour of the richest ten percent of taxpayers with modelling by the Parliamentary Budget Office showing that in 2024-25 a huge 64 per cent of the total cost of the three stages of the Morrison tax plan would benefit the top income quintile of people lodging a tax return, 20 per cent for the fourth quintile, but less than 13 per cent for the middle quintile and almost nothing for the bottom two quintiles.

The net result would have left Australia with a much less progressive income tax system than ever before and also compared with just about every other country.
In short, the Albanese Government’s Stage 3 tax changes that benefit eight and a half people out of every ten is not so much a “broken promise” but an improved tax system. After all, if I promised my grandson $30 for his birthday, and then gave him $50, I am sure he would never call that a broken promise.

Bracket creep
A key feature of the Morrison Stage 3 tax plan was that it proposed moving to a much more proportional (thus less progressive) tax system by abolishing the 37 per cent tax rate so that most people were subject to the same 30 per cent marginal tax rate. Now that this proposal has been dropped by the Government, the Opposition is arguing that there is now a greater risk of bracket creep leading to rising average tax rates over time.

It is true that average tax rates do rise as people’s incomes increase and they move to a higher tax bracket. But even if people remain in the same tax bracket their average tax rate can rise as their income increases and a higher proportion of that income is then subject to their marginal tax rate.

Nevertheless, the Treasury analysis shows that because the first tax rate will be reduced from 19 to 16 per cent, the Government’s redesign produces a smaller increase in average tax rates for the first seven income deciles over the next ten years. In other words, it reduces bracket creep for more people compared to the Morrison Stage 3 plan and also compared to a no change scenario.

Should Labor have done more for low paid workers?
So much for the criticism from the Right – such as it is – but an alternative line of criticism is that Labor’s redesigned Stage 3 tax package should have done even more for low paid workers.

In an interesting and well-documented article (Pearls & Irritations, 30 January) Brian Lawrence shows that the gains for low-paid workers under Labor’s redesigned Stage 3 tax package still leave them with higher tax rates than under the previous Labor Governments of Rudd and Gillard.

For example, A typical trade-qualified worker would be paying an extra 3.9 per cent of their income in tax in 2024-25 compared to the average proportion that they paid in the five Labor years to 2o13-14. Similarly, a part-time worker is projected to pay another 1.7 per cent of their income and a cleaner on the minimum award is projected to pay another 3.2 per cent of their income.

Part of the explanation for this rising tax burden is that average tax rates have risen for all taxpayers, and we would have less quality services if we went back to the average tax rates of that earlier Labor Government. But even so, Lawrence shows that average tax rates have risen more than proportionally for low-income taxpayers than for other better-off taxpayers.

So what can be done to help those who most need help with their cost of living?
Lawrence acknowledges that any rebalancing that involves changes in tax thresholds and marginal tax rates would be difficult. Instead, he proposes that the low income and low and middle income tax offsets should be reintroduced and increased as the best way of reducing the tax burden for low-income taxpayers.

But there are two problems with this solution. First, as Lawrence also acknowledges “this kind of change would come at a considerable cost.”

Second, these tax offsets are effectively means tested which means that they add to the marginal tax rates over the income range that they are being phased down. That in turn means that their re-introduction risks losing the increases in workforce participation expected under the Labor redesign and consequently would come at a further cost to the budget.

Given the priority that the Government is (rightly) attaching to fighting inflation and therefore balancing its budget, it is hard to see that this proposal to further assist low-income taxpayers by restoring and increasing the tax offsets will gain acceptance by the Government.

In sum, although many of us would like to help low and middle-income households more in response to the cost of living crisis, it is hard to see a better way of providing general non-targeted assistance than the changes to the Stage 3 tax cuts that the Government has proposed.

As the budget outlook improves as the economy picks up, any additional assistance would best come from more of the types of targeted assistance that the Labor Government has been providing so far. For those who want more redistribution, it is difficult to see how that can realistically be provided without gaining acceptance that taxation generally should be higher.

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