The stage-three tax cuts are politics over policy – and no way to save our struggling economy – Emma Dawson

January 10, 2024

If Anthony Albanese is determined to forge ahead with the Coalition’s fiscal booby trap, any political capital must be used on genuine redistributive tax reform

The third stage of the Turnbull government’s income tax cuts were always bad economic policy, even in those distant pre-Covid days when they were designed by the then treasurer, Scott Morrison.

While they may have been “affordable” according to the doomed economic forecasts of the time, they were never fair. Nor did they have any discernible purpose beyond effectively destroying the very concept of progressive taxation – a point I made on the night they were announced in May 2018.

Six years on from their conception, stage three of Morrison’s fiscal booby trap is not just a technically bad policy, but an effectively dangerous one. Despite a likely second successive surplus, the federal budget is in structural deficit for the foreseeable future, unable to meet such fundamental demands as adequately funding essential services such as aged care and the NDIS, or financing living wages for essential workers such as nurses, teachers and early childhood educators.

Not the time, one would think, to be removing more than $300bn from federal coffers over the next decade.

More immediately, given the inflation challenge Australia is yet to defeat, pumping $20bn a year into the pockets of the only people who aren’t experiencing a cost-of-living crisis is likely to worsen inflation – and even those economists who think the cuts may not be inflationary agree that keeping the 37% marginal tax bracket is common sense for a government that believes in progressive taxation and needs more revenue to fund services.

The truth is that the current cost-of-living crisis is, contrary to all orthodox economic theory, not born of temporary supply or demand factors, but rather results from the structural weaknesses in our economy that have been allowed – even encouraged – by the policies of successive governments over the last 30 years to grow to the point at which our system faces collapse. We simply do not have the revenue to support the necessary infrastructure of our daily lives.

We have, for decades, been coasting on the nation-building work of the postwar years. Our foundational infrastructure – hospitals, schools, transport networks, essential social services – is crumbling. We paid for it with taxes; apparently we don’t want to do that any more.

You’d be hard-pressed to find an economist who thinks the tax cuts as designed by Morrison should go ahead in their entirety, and the most recent annual Per Capita tax survey shows that only 13.2% of Australian voters think stage three should remain as is.

Yet among those whose job it is to analyse the politics, rather than the policies, of our parliament, there is a growing consensus that Anthony Albanese is right to be wary of breaking his election promise not to touch the tax cuts, given the fragility of his parliamentary majority and an admirable determination to restore trust in government.

This presents a miserable quandary for Albanese and the treasurer, Jim Chalmers. They are saddled with an income tax package that is both ideological anathema to their social-democratic base and a huge fiscal burden at odds with their efforts to restore effective budget management in the pursuit of public trust.

Yet if they break that promise to leave stage three untouched, they face the very real prospect of spending the next 18 months fighting a relentless battle with Peter Dutton and his cheerleaders in the rightwing media over broken promises and higher taxes.

And this is not the only invidious balancing act facing the government. Labor is under growing pressure to provide more cost-of-living support to struggling households, and to do so in ways that won’t further fuel inflation. They deserve more credit than they have received for well-targeted measures last year, including energy price caps and increases to commonwealth rent assistance, but such measures are piecemeal at best and most of the low-hanging fruit has already been plucked.

Any further cash support for households risks adding to inflation and making the problem worse, especially for those households with their heads just enough above water to not (yet) need income support but are therefore ineligible for payments such as rent assistance.

Whether stage three goes ahead or not, the long-term health of our society looks bleak, something not lost on a new generation of voters, some of whom were in primary school the last time a government took a serious look at our tax and transfer system in its entirety.

If the Albanese government is determined keep that (arguably unnecessary) election promise and allow stage three of the tax cuts to go ahead on 1 July this year for purely political reasons, then surely we must demand that they use any political capital gained by doing so to undertake genuine tax reform.

Such reform should be aimed at restoring the redistributive power of our tax and transfer system, to provide the same support to young people building their lives as we gave to their grandparents.

Modelling by the parliamentary budget office has shown that 77% of the stage-three tax cuts will go to households in the top fifth of income earners. As luck – or more accurately, the policy decisions of successive governments since the turn of the century – would have it, those same households are the major beneficiaries of federal tax concessions on property investment.

Natsem modelling has found that more than 80% of the value of the capital gains tax discount, and half of the value of negative gearing deductions, go to those households in the top fifth of income earners. Per Capita estimates these two concessions combined, for property investors alone, will cost the budget as much as $18bn this year. That’s almost as much as the cost of stage three – and more than ten times what the federal government currently spends on social housing and homelessness services through the National Housing and Homelessness Plan.

So, fine: on stage three, I give up. Go ahead and keep that election promise, Albo. But surely, if the wealthiest households are to receive yet more government largesse in the form of more than $8,000 a year in income tax cuts, it’s time to start taxing the wealth they have already accumulated thanks to years of generous tax concessions.

That would show that you and Jim Chalmers are serious about restoring fairness to our tax system and building a future for all young Australians, not just those who will inherit the family holiday home.


Originally Published in the Guardian Australia, 10th of Jan 2024.