Changing stage three tax cuts is an election promise worth breaking, policy expert says – Shannon Malloy

January 24, 2024

Anthony Albanese is set to water down stage three tax cuts for higher income earners, representing a major broken promise – but it’s worth it in the long run, one expert says.

Proceeding with “unfair” stage three tax cuts because it was promised at the last election is not a good reason to waste tens of billions of dollars on wealthier Aussies who don’t need it, one leading expert believes.

After weeks of speculation, Prime Minister Anthony Albanese is set to announce sweeping changes to the looming reforms, watering down benefits for high-income earners to deliver more savings to those struggling.

It would set up Labor for blistering attacks from the Coalition and special interest groups that it has “betrayed” voters by going back on its election commitment.

Emma Dawson, executive director of think tank Per Capita and an expert in public policy, was never a fan of the stage three tax cuts and believes changes are necessary and fair.

“Removing a key tax bracket, the 37 cent rate, and reducing the 32 cent bracket to 30 cents, is effectively destroying the concept of progressive income taxation,” Ms Dawson said.

“There are arguments to be made – certainly valid arguments – about how those thresholds should change over time, whether they’re indexed to wages or inflation, and there’s definitely an issue with bracket creep at the top.

“But rewarding the very highest income earners without doing anything permanent for those in low and middle incomes … makes our tax system much less fair.”

Estimates are the stage three package in its current form would cost the budget $323 billion over the coming decade, making them a costly exercise with minimal benefit, Ms Dawson argued.

“More than half of that is going to the top five per cent of income earners earning more than $180,000 a year. Someone bringing in $200,000 a year gets another $9000 and they’re likely to put that into their superannuation or invest it in shares.

“And that’s money we can’t spend on schools and hospitals and roads, and all of the things that we share as a society.”

‘Didn’t make sense then’

In recent months, in attempting to justify the government’s support for stage three, Prime Minister Anthony Albanese and Treasurer Jim Chalmers have repeated assurances that Aussies earning at little as $45,000 a year will benefit.

While that’s true, Ms Dawson pointed out that the benefit to those workers is about $1.80 a week.

“Everyone earning between $45,000 and $200,000 will be on the same tax rate of 30 per cent, which isn’t fair. Those who earn $45,000 get back two cents for every dollar above that. It’s a tiny benefit and won’t make much of a difference.”

Middle Australia, which has been battered by soaring interest rates and a cost-of-living crisis that’s seen just about everything become more expensive, “won’t get a drop” of benefit.

“Stage three is hard to defend on an equity basis, a cost-of-living basis, and an inflationary basis.”

Ms Dawson said the package didn’t make much sense in 2018 when proposed and “makes even less sense now”, describing changes as “crucial” despite the political cost.

“This decision was made for purely political decisions in the first place,” she said.

When in opposition, Labor opposed stage three and tried to carve it out from the bill in the senate but was unsuccessful.

“They had no choice but to pass the whole package, so they’ve been saddled with something they oppose ideologically, but also that is the wrong thing to do now fiscally.

“To put more money into the economy, into the pockets of the wealthy, widening the wealth divide without lifting the take-home pay of those doing it tough, while possibly adding to inflation … there’s no good argument for keeping them other than ‘we said we would’.”

A broken promise

Proceeding with stage three tax cuts because they said they would should be a good enough reason for the government, Australian Taxpayers’ Alliance president Brian Marlow argued.

“This isn’t just about the numbers – it’s about trust,” Mr Marlow said.

“Voters need to ask themselves if they can trust a government that promises for years to do one thing, only to stab hardworking Australians in the back at the last minute.”

Making tweaks to stage three “sends a clear signal” that the government can’t be trusted and “is out of ideas and incredibly stupid”, he added.

“I don’t think Labor realises it’s not 2007 anymore where $180,000 was considered big money.

“Many tradies, small business owners, and working professionals, who are vital to our economy, earn around this amount in personal income. Bracket creep, a secret tax that generates billions for the government, has ensured that many middle-class workers end up in higher tax brackets.

“These are hardworking people, not just numbers on a spreadsheet that you get to label as ‘the big end of town’.”

Recent polling by RedBridge shows Labor still leads on a two-party preferred basis among voters experiencing financial hardship, but that’s largely due to preferences flowing from the Greens – not direct support.

“Just 33 per cent of voters agree the Labor government is focused on the right priorities,” the polling report read.

“Voters who say their financial situation causes them stress are less likely to agree that the government has the right priorities.”

Mr Marlow believes Labor risks losing support to the Coalition and Opposition Leader Peter Dutton, particularly in working-class electorates.

“They’ve been planning their lives and finances around these tax cuts that Labor repeatedly promised they wouldn’t touch.”

What should happen now

Caucus meets Wednesday for an emergency meeting about the cost-of-living crisis and Mr Albanese will address the National Press Club tomorrow.

It’s expected a decision about stage three will be made then, with a reported redesign unveiled.

In terms of what should happen, Ms Dawson has some ideas.

“The simplest thing to do would be to reinstate the 37 cent bracket, but perhaps lift its threshold to $120,000, recognising that a household with a mortgage in a capital city these days isn’t exactly swimming in cash.

“Under stage three, the 45 per cent bracket will cut in at $200,000 instead of $180,000. Maybe 37 cents goes up to $220,000 and 45 cent is pushed back for really high incomes.

“The other simple thing to do is lift the tax-free threshold from $18,000. It hasn’t been looked at for a decade. Raising it would give everyone who pays income tax something back in their pocket.”

Mr Albanese and Dr Chalmers should amend the package now to support Aussies doing it tough, and then more broadly look at how the tax system is managed as a whole, she said.

“I’d argue that reducing income tax in favour of asset taxes is ultimately the way to go,” Ms Dawson said.

When people who don’t own investment properties, and perhaps don’t own their own home yet, are in their 20s and 30s, we tax them less than when they’ve acquired assets and live off passive income via investments or super.”

Strong case for urgent support

The cost-of-living crisis plaguing millions of Australians is much worse than the government has claimed, Peter Martin, a visiting fellow at the Crawford School of Public Policy at the Australian National University, reveals in analysis published in The Conversation today.

CPI, the measure of inflation used by the Australian Bureau of Statistics, “understates” living costs because it doesn’t include mortgage and other interest payments.

“We know by how much,” Mr Martin wrote.

“For years, the bureau has also published a separate set of measures it pointedly calls ‘living cost indexes’. These do include mortgage and other interest charges, and for households headed by employees – for whom the buying power of wages matters – they are substantial.”

Anthony Albanese says circumstances have changed. Picture: NCA NewsWire / Luis Enrique Ascui

Latest figures for the year to September put inflation at 5.4 per cent, but the living cost index was sitting much higher at nine per cent, he pointed out.

“For these working households, the price of food climbed 4.8 per cent in the year to September, the price of electricity 14.5 per cent, and the price of mortgage interest charges 68 per cent.

“It’s the increases in mortgage rates that have made the increases in the other prices hurt so much.

“The overall increase in prices faced by wage-earners [of nine per cent] is way above the typical wage increase of four per cent.”

The buying power of average wages has been falling for two-and-a-half years now, he added.

Mr Marlow argues that many of those middle-income Australians are being taxed too much because of bracket creep.

Originally published as Changing stage three tax cuts is an election promise worth breaking, policy expert says, 24th Jan 2024