Stage three a taxing political issue

There might be more politics than policy in Anthony Albanese’s statement on Tuesday that “everyone” is going to get a tax cut. With the by-election for the Melbourne seat of Dunkley on March 2, the Prime Minister appears to have been swayed by arguments that the stage three legislated tax cuts in full, due to kick in mid-year, should be dropped because they “help those who need it least”, according to Australian Council of Trade Unions secretary Sally McManus.

Mr Albanese would have been wiser to stand firm against the siren song of such opportunism. The case for stage three is stronger now than when Labor adopted the Coalition’s changes as its own, and it will get stronger as pay rises push more people into higher tax brackets. Stage three was to return up to $1300 a year lost by average wage earners to higher tax rates. There are now around 700,000 people in the highest tax rate, compared to 180,000 when the top threshold was lifted to $180,000 in 2009.

According to a Parliamentary Budget Office analysis, not adjusting the upper threshold would mean 2.7 million people (16 per cent) in the top income tax bracket in 2033-34, an increase from 8 per cent in 2024-25. For the government to give up delivering an equitable and easily implemented adjustment, to overcome the worst ravages of bracket creep, in full will make the task of structural change to the tax system even more unlikely than it has been since the GST, the nation’s last significant tax reform, a generation ago. If some of the Senate backbench are prepared to show some spine, it could also prompt a huge political row over the fact the government is effectively increasing taxes for many of our most productive workers. It now appears the 37 per cent tax bracket – due to be abolished under stage three – will remain for those earning $135,000 and above. The top marginal tax rate of 45 per cent is likely to be lifted to $190,000, below the $200,000 under stage three. And workers earning less than $135,000 will receive bigger tax cuts.

Australia’s tax model is out of date – we have a corporate tax rate 9 per cent higher than the US and 5 per cent above the UK, which will leave Australia uncompetitive in the global economy. The tax interface with the states is a mess – they rely on payroll tax, which is a tax on employment, which should have been abolished when the GST arrived. The High Court’s recent decision that a Victorian tax on electric vehicles was an “excise”, which only the commonwealth can levy, will erode the states’ revenue base. And the GST now provides 15 per cent of the tax take, compared with almost 50 per cent from PAYE tax. But as Mr Albanese does not appear to have the stomach for the full stage three tax cuts, it is unlikely he would take on a challenge comparable to that which John Howard met when he introduced the GST.

Mr Albanese needs to consider the big economic picture. Welfare lobbies and politicians of the “soak the rich” stripe are wrong. Australia’s highly progressive tax system does not exploit low-income earners. To the contrary, figures released last year by the Australian Taxation Office demonstrate that in the 2020-21 financial year, the 4 per cent of people earning $180,000 or more paid more than 35 per cent of net tax. Australia is good at sharing the wealth. As The Australian recently reported, research by Ben Phillips of the Australian National University finds the bottom 40 per cent of households (with incomes up to $70,000 a year) got through the pandemic with earnings unscathed because of increases in, and indexation of, welfare payments.

Another reason for the stage three tax cuts that does not get mentioned as much as it should – especially by naive media commentators spouting about whether “the rich’’ deserve a tax cut – is that all the talk about “giving money back’’ to high-income earners ignores the obvious: it is not the government’s money in the first place. It is taxpayers’ money, taken from them through bracket creep. Nor is it often mentioned that these cuts are called “stage three” for a reason. Two earlier generous income tax reductions for low- and middle-income earners were given by the Coalition. Stage one was the one-off, Covid response low- and middle-income tax offset. Stage two reduced the marginal tax rate for people earning up to $120,000. Stage three cuts became law in July 2019, when the Coalition was in office, and have been bipartisan policy until now, with Labor adamant until the last few days it would stick to its word and deliver them. Mr Albanese’s backtracking will be a gift to Peter Dutton and a backward step away from the reform the nation needs.