MICHAEL KEATING. Tax Cuts, the Economy and the Next Election

Last week the Government got its personal income tax package through the Parliament. The Government estimates that these tax cuts will cost the Budget $144 billion over the next decade. The Government has not, however, provided us with convincing evidence that the nation can afford this generosity and how it proposes to pay for these cuts while still returning the Budget to a sustainable surplus.

But no worries. According to the Government, there is no need for the public to reason why and how these tax cuts are reasonable. Instead, the Government celebrated its legislative victory, urged on by its usual media cheer squad. Yes, we were invited to think that all the Government’s troubles were over now that it has achieved passage of its personal income tax policies, with just the company tax cut for very big companies remaining to be passed.

As the saying goes, however, a week is a long time in politics; or even a weekend in this case. Less than a week after the tax cuts were legislated, Fairfax Media released its opinion poll, taken just after that event, and reported that no votes had changed in response to the promised tax cuts. As far as the Press Gallery is concerned the critical question is why have no votes changed, and why is the Government still behind in the polls?

Unfortunately, the Gallery has long since lost any capacity for real analysis of the issues and focuses only on the politics. Accordingly, the Gallery came up with its usual answer: the electorate is unmoved by these tax cuts because they don’t trust the Government – or any other politicians – to deliver on their promises.

The Gallery loves this sort of explanation as it allows them to pontificate in terms of a plague on all political parties, without ever appearing partisan. However, the consequent damage to our body politic is such that people have been cynical about political promises for forty years or more. Furthermore, I don’t think this most recent Gallery analysis provides any reason for thinking the public would be more cynical about these latest tax cuts than any other such promises that have been made in the past (although they certainly should be – see my article, ‘How Useful and Reliable are the Budget Projections’, posted on Pearls & Irritations, 29 May, 2018).

Instead, in my view the most probable reason why these tax cuts are not leading the public to switch their votes in favour of the Government is because most people are smart enough to realise that they will gain next to nothing from this tax package. Indeed, the only surprising thing is that the Gallery itself cannot see that and write it up.

The reality is that even when fully phased in by 2025, these tax cuts amount to only $10 per week for anyone with a taxable income up to as much as $70,000 a year (Table 1). Even a taxpayer with a taxable income as high as $90,000 a year, will still only get a tax cut equivalent to $13 per week. On the other hand, those taxpayers with taxable incomes of $120,000 per year and $200,000 per year will get a cut equivalent to nearly $40 per week and $140 per week respectively.

Table 1 The Government’s Income Tax Cuts ($)

Income per year Tax Liability today Tax Liability 2025 Saving
30,000 2,397 2,197 200
50,000 8,547 8,007 540
70,000 15,697 15,157 540
90,000 22,732 22,057 675
120,000 34,432 32,407 2,025
200,000 67,232 60,007 7,225

Source: Treasury as cited in James Fernyhough, ‘This is how the biggest tax cut in history will affect you’, posted in Pearls & Irritations, 23 June, 2018.

In addition, while the Treasurer likes to talk about middle-Australia by referring to people with incomes of $90,000 or even a bit more, the reality is that the average wage (allowing for the fact that almost one third of workers work part-time) is $62,000 a year, the median wage is just over $55,000 per year, and the median tax-filer’s income is just under $45,000 a year. In other words, half the workers in Australia are only earning 60 per cent of what Scott Morrison likes to think of as ‘middle Australia’, and the average taxpayer has an income which is only half that of Scott Morrison’s dream for middle Australia. In short, Australia’s middle-income earners have incomes which are much less than Scott Morrison claims, and much less than the people who are the real beneficiaries of his tax cuts.

Thus, for almost all taxpayers the Government’s personal income tax cuts are almost insignificant, but for a few wealthy people these tax cuts are very significant. But the people whom the Government is trying to con are smart enough to know what their personal income is and this means that they can work it out that they will not gain anything significant from this tax package. It should therefore be no real surprise that most people presently inclined to vote Labor will not be persuaded by these small reductions in their tax to change their vote in favour of the Coalition. Indeed, most undecided voters may well be persuaded that they would gain more from Labor’s proposed tax changes, which will arrive sooner, and are much more affordable.

Michael Keating is a former Head of the Department of Prime Minister and Cabinet.

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2 Responses to MICHAEL KEATING. Tax Cuts, the Economy and the Next Election

  1. Peter Sainsbury says:

    The Treasury table reproduced in P&I by Fernyhough and Keating demonstrates the gross inequity of the tax cuts not only in absolute dollar terms but also in percentage terms. The percentage reductions in tax for each of the sample annual incomes shown are:
    $30,000 8.3%
    $50,000 6.3%
    $70,000 3.4%
    $90,000 3.0%
    $120,000 5.9%
    $200,000 10.7%

    In summary:
    1 not only do the richest get the most in spendable dollars, they also get the most in percentage terms (10.7%) – this is clearly a regressive tax change;
    2 that said, the two lowest income groups receive the second and third highest percentage tax reductions, although what they receive in spendable dollars is paltry compared with the top group, and even the second highest income group;
    3 the ones who gain least in percentage terms are the two groups in the middle which each benefit from a 3% or so reduction in their taxes, and have a reduction in their actual dollar tax payment which is much closer to the reductions of the lower than the higher income groups.
    These figures demonstrate very clearly where this government’s allegiances lie and who is waging and who is winning the class war. They also demonstrate the complete falseness of Morrison’s claims to be helping middle Australia, whether they are Morrison’s $90,000 per year ‘middle’ or the statistical ‘middle’ presented by Keating.
    The aim of the Liberal Party is the preservation of privilege, whether that be the privilege of individual Australians, the privilege granted to corporate and financial elites, or the privilege enjoyed by Australia as a nation compared with many less fortunate nations. When in government they can be relied on to champion this aim relentlessly and effectively. The tax changes are just one more example.

  2. Jocelyn Pixley says:

    I agree with the analysis and comment. What also needs to be asked, is that the sole justification (given) for this regressive move is not convincing. The policy is touted in the name of removing “bracket creep”. But no one’s wages is creeping up, rather wages are flat or going backwards. This is notably in the further huge cuts to penalty rates, effective 1 July. Naturally the public do not believe $10 a week less tax for most people changes anything for their life chances, although the LNP insists that it will, also they throw in the company tax cuts. No study shows that companies are willingly raising wages. Meantime, Australian household debt is 200% to GDP.

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