Tax cuts for highest income earners causing Labor clash

Billions of dollars in tax relief for high income earners is fuelling a fresh dispute within federal Labor, leading to conflicting positions and driving fears mishandling the debate could damage its election prospects.

Labor MPs are debating whether they should support the government’s stage three cuts ahead of the next election, which would ensure about 95 per cent of workers paid no more in tax than 30c in the dollar, multiple sources familiar with the discussions said.

Supporters of Opposition Leader Anthony Albanese are cautioning him of the political risk involved in changing the policy, while several leading right faction figures are pushing to give lower income earners more and cap the cuts.

Labor is grappling to find agreement on stage three tax cuts.Credit: Alex Ellinghausen

Deputy leader Richard Marles said on Sunday the party’s instinct was not to “stand between people and a tax cut”. However, days earlier shadow treasurer Jim Chalmers opened the door to delaying tax relief for top earners to help with budget repair. Meanwhile, Labor’s spokeswoman for senior Australians and aged care Clare O’Neil signalled on ABC TV on Sunday there could be an extension of tax relief for lower income earners.

“Can I just remind you, the only major party that has a policy to increase taxes on Australians going into this election is Scott Morrison because they’re removing the low and middle income tax offset,” she said. “That’s not Labor’s policy.”

There is growing unrest within senior Labor over its indecision on stage three, with several frontbenchers concerned they will walk into a Coalition scare campaign repeating previous election failures. There has also been no announcement about further relief for lower and middle income earners.

Stage three, which lifts the threshold for the top tax rate to $200,000 from $180,000 and scraps the 37 per cent tax bracket for those earning above $120,000, is worth about $17 billion in refunds to top earners in the first year. The cuts are legislated to start in 2024 and were introduced as part of a plan to offset “bracket creep”, where inflation pushes workers into higher marginal tax brackets, and to make the tax system simpler.

Another part of the plan was the low and middle income tax offset, worth a maximum of $1080 for those earning up to $90,000. This was extended for an additional year in the budget, attracting concerns that when the temporary relief ends lower income earners will face a hike in their annual tax bill. Labor and the Coalition are both under pressure to permanently keep this offset.

Labor voted for the cuts before the pandemic but warned 2024 was too far away to determine the budget implications. Dr Chalmers last week said this position had been vindicated, adding the cuts are a large sum for the highest earners at a time when the budget deficit is forecast to reach $167 billion for 2020-21. He said the temporary nature of cuts for low-income earners was an issue.

Several Labor MPs are warning the future of the election is at stake if it doesn’t navigate this policy carefully. Some MPs want the cuts thrown out altogether, with Labor sources describing it as “mighty peculiar” any government staring down a $1 trillion debt would proceed with cuts of this size.

Other Labor MPs want a revised scheme, such as keeping the plan to scrap the 37 per cent tax bracket but not lowering the brackets.

A Labor frontbencher said if the party took a nuanced policy to the election “Morrison will tear us to shreds”. Another Labor MP said the debate had been reduced to one of “‘we are the party of low tax, Labor is the party of high tax’ ... It robs you of the possibility of a serious discussion.″⁣

The Greens, Australian Council of Trade Unions and The Australia Institute have been critical of stage three, while the Grattan Institute has previously recommended the government hold off on the final cuts, saying it may not be affordable, over-compensates high income earners and makes the tax system less progressive. Former Reserve Bank governor Bernie Fraser has criticised the cuts as “unfair”.

But stage three is broadly supported by business groups as well as prominent economists and think tanks.

Continuing with stage three could represent a risk for both the Coalition and Labor, with several prominent women’s advocacy groups saying the tax relief benefits men more than women.

The National Foundation of Australian Women wants to scrap the stage three cuts or restructure them to be more progressive, saying in a budget gender lens paper released on Monday the cuts are “inequitable”. The savings could then be used to help fund aged care and childcare, the paper says.

The foundation’s social policy committee chair Professor Helen Hodgson said short-term funding would be subject to future spending cuts to repair the budget when the government moves away from stimulatory fiscal policy.

“If the government proceeds with the stage three tax cuts ... it will be tempted to cut back on social infrastructure to pay for it,” Prof Hodgson said.

A report from the Australian Council of Social Services also released on Monday shows 70 per cent of the benefit of the tax cut would go to men, or about $2989 a year compared to $637 for women. ACOSS warned the tax cuts would “likely result in future budget cuts to essential services”.

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