

Tax cuts are no handout to the rich

Tax paid by high income earners will vastly outstrip their growth in wages unless the Senate passes the full tax cut package, a new analysis shows.

With Labor and the Senate crossbench declining to commit to the full tax package and rejecting the government's claims it has a mandate, the analysis shows the tax cuts do little more for high income earners than keep bracket creep at bay and preserve the proportion of tax they currently pay.

The resistance towards the tax package is focussed on stage three which would begin on July 1, 2024. It will apply a 30 per cent tax rate to all incomes between $45,000 and $200,000 at a cost of $95 billion, of which an estimated $33 billion would go to people currently earning over $180,000.

The government argues that stage three is warranted because the $180,000 income threshold has not been increased since 2008-09 while all income thresholds below it have been substantially increased over the same time.

The analysis by The Australian Financial Review, based on official data, shows someone earning $180,000 in 2008-09 would be earning $284,454 by 2024-25, based on past and forecast wage inflation.

This amounts to a 58 per cent increase in wages.


But the same person's income tax liability over the same period would increase by 76 per cent, growing from $60,700 in 2008-09 to $106,925 in 2024-25.

Not a handout

If the full tax package was passed, the income tax liability in 2024-25 would be $95,285 which is an increase of 57 per cent, virtually the same growth rate as that of wages.

Finance Minister Mathias Cormann said stage three was not a handout to the so-called rich but would combat the "silent thief'' of bracket creep.

"Bracket creep is the silent thief which if left unaddressed would undermine aspiration and weaken the economy over time,'' he said.

"That is why we are so committed to addressing bracket creep as well as delivering income tax relief to low income earners."

If the tax cuts were passed, the top 5 per cent of income earners would continue to pay one third of all income tax and the top 20 per cent would continue to pay about 60 per cent.


"So, the progressivity of our income tax system is maintained,'' he said.

Senator Cormann held talks in Perth yesterday with Centre Alliance Senator Rex Patrick, whose vote is needed if Labor baulks at stage three. The Centre Alliance is positively inclined towards the tax cuts but wants to ensure they are not gobbled up by rising energy prices.

While Senator Cormann is not prepared to do special deals with the crossbench, Senator Patrick has presented the government with changes to the Domestic Gas Security Mechanism to try a increase supply and lower prices.

One Nation's Pauline Hanson is still holding out against the cuts but the government could secure the package with the support of Centre Alliance and newly-elected Tasmanian senator Jacqui Lambie, who is undecided.

Labor divided

Labor is divided. Stage three is worth $95 billion of the $158 billion the unlegislated tax cuts will cost. Some senior figures believe it is too much money to commit to in advance, especially when the economic outlook is uncertain. Others oppose it on the grounds high income earners should not be given a tax cut.

But those for the tax cuts argue Labor should show it has learned the lessons from the election and drop the class war rhetoric upon which it relied to oppose the tax cuts.

If they proved unaffordable, that would be the Coalition's problem.


"Just wave them through. It's not our job to save this mob from themselves,'' said one ALP frontbencher.

The frontbencher said as long as Labor held out over the tax cuts, it, not the government, would continue to be the story.

Labor leader Anthony Albanese has not ruled out supporting stage three but yesterday rejected the government's claim that it had received a mandate for the tax cuts at the election.

He said 48.5 per cent of people voted Labor. "Those people are entitled to have their views represented,'' he said.

CIS backs bracket creep argument

Centre for Independent Studies senior economic fellow Robert Carling backed the government, saying stage three would likely fall short of covering bracket creep since the last major change in 2008.

"If you go back to 2008, the tax cuts are doing no more than handing back the proceeds of bracket creep.


"The top threshold would have to be going to up something like $250,000 just to keep pace with inflation over those 16 years. It's not going anywhere near that, only to $200,000, so whichever way you look at it, the argument it is overly beneficial to the highest income earners is nonsense.

"It only appears beneficial to high income earners because the third tranche, the 2024 instalment, only benefits those above $45,000. Most of the benefits are to those above $120,000."

He said when considered as a whole, claims wealthy Australians were receiving the most benefit didn't hold up.

"The government has really made the case more difficult for itself by splitting it up this way, making the high income earners wait this long and then giving the appearance that the third instalment is only beneficial to them. It is completely artificial," he said.

Tax Institute senior tax counsel Bob Deutsch said the cuts would provide some compensation for those at the top of the income scale, while also boosting broader growth and protecting the progressive system.

"It will compensate people for bracket creep of previous years and it will help to alleviate some of that additional stress," he said.

"It will give rise to some compensation for what has clearly been bracket creep, as people have moved up that ladder of income. I think it will be a bit more than that, creating a flatter tax system over all.

"The issue is what likely to create the most efficient growth environment in Australia. I think this is likely to do that."

Stage one, which is backdated to July 1 last year and worth $15 billion of the $158 billion, will more than double, from $530 to $1080, the end-of-year rebate for low- and middle-income earners.

Stage two begins on July 1, 2022. It increases the top income threshold for the 19 per cent tax bracket from $41,000 to $45,000 at a cost of $48 billion out of the $158 billion.

Read More

Phillip Coorey
Tom McIlroy

Most Viewed In Politics