Stage 3 tax cuts a balancing act between economics and trust

After years of refusing to shape-shift on stage 3 tax cuts, Anthony Albanese will reveal the details of his changes on Thursday. Much is at stake for a prime minister and government stuck in the doldrums.

There are two ways of analysing Labor’s shift: first, whether the amendments to the long-legislated package make economic and fiscal sense, and second, whether the decision will further undermine trust in politics after so many years of broken promises dating back to Julia Gillard and then Tony Abbott.

While some of the reforms signed off by cabinet and caucus may well make sense, that does not absolve Albanese from breaking an election promise. It was wrong for Gillard and Abbott to break key promises and it is wrong for Albanese to follow suit. Voters will be right to question his future assurances.

Hours before he took the stage 3 tax cuts proposals to the Labor caucus on Wednesday, Albanese said they were all about supporting middle Australia. “We know that there are cost-of-living pressures on middle Australia, and we’re determined to follow the Treasury advice to provide assistance to them,” he said.

Until now, Albanese has not overtly criticised the third stage of the Turnbull government’s income tax cuts, designed by the-then treasurer, Scott Morrison, and legislated at the time with the support of Labor.

The Herald’s Ross Gittins noted that as it stands, stage 3 offers the most financial benefit to a minority of voters, most of whom are unlikely to vote Labor. Gittins observes that if Albanese cannot convince most voters he broke a promise because they needed more financial support, he ought to get out of politics.

But we would point out that the legislated tax package from July 1 is the third in a wave. The first two waves directly targeted lower income earners.

Do higher earners get more tax relief when considering all three stages combined? Absolutely, according to Steven Hamilton, assistant professor of economics at the George Washington University and visiting fellow at ANU’s Tax and Transfer Policy Institute. “Because they pay a lot more tax,” Hamilton says. “Someone with a taxable income of $200,000 per year pays around $61,000 in income tax, while someone on $50,000 pays some $6700. Four times the income – but nearly 10 times the tax.

“That means if you cut each of their taxes by 1 per cent, the higher earner gets a cut that’s 10 times as big. Ultimately, in terms of average tax rates, stage 3 doesn’t dramatically alter the progressivity of the tax schedule.”

Sniffing a political opportunity, the opposition has made great hay with Albanese as he teetered toward changing his mind on stage 3. The timing of the announcement also has the hint of targeting lower middle-class mortgagees and low-income earners in the marginal Melbourne seat of Dunkley; they will vote in a March byelection following the death of Peta Murphy, who won it for Labor by less than 2 per cent. Albanese is fighting a midterm slump to retain the seat.

Albanese has justified his changes by citing cost-of-living pressures, and the Herald does not dispute that many Australians are currently doing it tough. But cost of living was as a big issue when Labor was elected in May 2022 and when Treasurer Jim Chalmers framed last May’s budget. The only things that have changed since are that the stage 3 cuts are due to kick in on July 1 this year, and that Labor is in trouble in the polls after failing to read the electorate’s cries for help last year.

Aside from the matter of trust, the other major issue to be examined is whether the changes make economic and fiscal sense. Already, there are fears the changes could unbalance the package, especially given the impact of bracket creep. But we are yet to see full details and so reserve judgment.

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