Budget 2016: Government skews 'prudent' tax cuts to higher income earners

• Federal Budget 2016: Full coverage
• Winners and losers
• Mark Kenny: The do no harm budget
• Jessica Irvine: Pennies for the rich
• Michael Gordon: Time for the great persuader to sell it

The federal government has skewed cuts in personal income tax rates to higher income earners, with about 75 per cent of taxpayers missing out entirely on relief announced in the budget after the government judged they had already benefited enough from recent tax cuts and compensation for the carbon tax.

While those with taxable incomes of less than $80,000 per annum will get no tax cuts, those earning between $80,000 and $180,000 will receive a weekly boost of up to $6.04 from July 1. While Peter Costello famously delivered a miserly "milkshake and sandwich" tax cut more than a decade ago, the quantum of this year's tax reduction is likely to give taxpayers enough only to buy the milkshake.

The modest benefit is the result of the government lifting the income threshold from $80,000 to $87,000 at which the marginal tax rate rises from 32.5c in the dollar to 37c in the dollar.

For those earning more than $180,000 per annum, the benefit is far larger as the temporary budget repair levy introduced in the 2014 budget expires on June 30 next year. For an individual with $250,000 of annual taxable income, for example, they will keep an extra $26.85 per week after the 2 per cent levy is abolished. High income earners also get the benefit from the changes to the tax threshold.

It will take more than just rhetoric to tame Aussie bulls.Credit: Glenn Hunt

Treasurer Scott Morrison acknowledged the changes in the tax threshold provided only a modest boost for taxpayers but defended them as prudent.

"They are important. They are affordable. They are not funded by higher deficits or higher borrowing," he said in his budget address to Parliament.

"This modest tax relief demonstrates that wherever possible we prefer to leave a dollar in Australians' pockets than take it for the government's pocket, because we know that it is money in your pocket that can help you and your family most."

Mr Morrison said the changes from the tax threshold would save 500,000 taxpayers from moving into the second top marginal tax rate of 37c in the dollar. A marginal tax rate impacts on earnings above the income level at which it kicks in.

While providing a small windfall for workers, the change in the tax threshold will cost $3.95 billion over four years.

In its budget overview, the government explained why the tax cuts were skewed to the top 25 per cent of earners.

"In recent years, those on low incomes have benefited from tax cuts and the carbon tax compensation that has been retained despite the carbon tax being abolished," the overview said.

"Without action, the average full-time wage earner would face the second highest marginal tax rate this year and nearly half of all taxpayers would be in the top two brackets in 10 years' time."

The use of the phrase "average full-time earner" is, however, misleading. Most workers have taxable income well below the full-time average wage.

The median taxable income is $44,592 while just over 20 per cent of workers have taxable income of more than $80,000, according to the Australian National University's Ben Phillips.