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This was published 3 years ago
Ten million face hip pocket hit without budget tax cut
By Shane Wright and David Crowe
The Morrison government and the opposition will have to promise tens of billions of dollars’ worth of personal income tax cuts to 10 million workers on low and middle incomes — many of them women — or risk slowing Australia’s recovery from the pandemic.
Analysis for The Age and The Sydney Morning Herald shows people earning less than $126,000 a year face a tax hike from next financial year.
Without any change, about 3.4 million people will be $1080 a year worse off while another 7 million will have less take-home pay, according to the analysis by the Bankwest Curtin Economics Research Centre.
Josh Frydenberg hands down the 2020-21 budget which contained a one year extension of the low and middle income tax offset. The offset ends in 2021-22.Credit: Dominic Lorrimer
It is due to the end of the low and middle income tax offset that was extended for one year in the 2020-21 budget as part of the decision by Treasurer Josh Frydenberg to pull forward stage 2 of the government’s overall tax reform package.
The offset, paid as a refund once people complete their tax returns at a maximum rate of $1080 for people who earn between $48,000 and $90,000, costs the budget more than $7 billion a year.
Once it ends this financial year, the 10 million who claim either all or part of the offset will suffer an increase in their overall tax.
Even after the government’s third tranche of legislated tax cuts start in 2024-25, people earning less than $88,000 will pay more in tax than they will this financial year.
A person on $80,000 will this year earn a net income of $63,013. Next year, without a tax cut, this will fall to $61,933 and remain there until 2024-25 when their take-home pay will increase to $62,808.
By contrast, a person earning $250,000 will pay $9075 less in tax in 2024-25 compared to the 2020-21 financial year.
The end of the offset will also increase the effective marginal tax rate for those on $40,000 a year, just above the minimum wage, from 18.5 per cent to 26 per cent.
Rebecca Cassells and Alan Duncan from the Bankwest Curtin Economics Research Centre said the end of the low-middle income tax offset will hit women more than men as they are more likely to be earning less than $126,000 a year.
They said the cumulative increase in income taxes paid by an average woman over the next three years would reach $1506 compared to $1156 for men.
Bankwest Curtin Economics Centre deputy director Rebecca Cassells says the end of the low and middle income tax offset will disproportionately affect women.
“The withdrawal of the low and middle income tax offset from 2021-22 will disproportionately affect women, who will face an average increase in taxes paid of $502 per year from 2021-22 to 2023-24, relative to 2020-21,” they said.
“For men, the average annual increase in taxes paid will be lower, at around $385 per year.”
They said the issue could be addressed by extending the low-middle income tax offset for the next three years. But that would cost the budget at least $21 billion at a time when the government would be trying to reduce its budget deficits.
The last time a government increased personal income tax on so many people was in the 2014-15 federal budget when then Treasurer Joe Hockey introduced the temporary 2 per cent budget repair levy on people earning more than $180,000.
This time, the increase would hit the economy just as the government winds back much of its pandemic-related stimulatory support.
KPMG chief economist Brendan Rynne said the increase in the tax rate could deal a $5.5 billion hit to the economy in 2021-22 and a $6.1 billion hit the following year.
“Every dollar that you take back in tax is a dollar that doesn’t go into consumption,” he said.
Dr Rynne said many Australians had benefited from the sharp rise in asset prices, such as property and shares, that was being driven by very low official interest rates.
But people receiving the low-middle income tax offset were less likely to hold these type of assets.
Mr Frydenberg, who is expected to reveal a deficit for this financial year of about $150 billion, would not be drawn on when the government would deal with the issue.
“We’re working to a fiscal envelope, we’re working to a set of priorities,” he said.
“We’re in the middle of a pandemic, and we’re transitioning off emergency support to more targeted support. So we’ve got lots of pieces in the jigsaw operating.”
Labor’s Treasury spokesman Jim Chalmers would also not be drawn on its approach to personal tax cuts, instead focusing on the government’s budget spending.
“If Josh Frydenberg hadn’t wasted billions of dollars on JobKeeper for already-profitable businesses which didn’t need it, he’ d have more room to ease cost living pressures on working families,” he said.
“With a trillion dollars in debt already racked up in a budget riddled with rorts, any additional tax relief should be directed towards those who need it most.”