Stage three tax cuts vital to middle-income earners

Scrapping or watering down the stage three tax cuts would be a betrayal of two of Labor’s favourite political catchcries when it was in opposition – integrity and “getting wages moving”. Anthony Albanese and Jim Chalmers promised unequivocally, countless times, to retain the cuts, which were designed by the Coalition to be the end stage of a substantial three-part reduction of personal income tax. Stage one, in 2018, benefited the lowest-income earners. Stage two, which the Morrison government brought forward to the 2020-21 budget, helped 11 million taxpayers earning up to $120,000. Abolishing stage three, as some government members, the Greens and ACTU leader Sally McManus are urging the Treasurer to do, would leave an important reform half done. As well as breaking a key promise, failing to deliver the cuts would do precisely what Labor consistently accused the Coalition of doing through its approach to industrial relations – that is, leave workers worse off overall, with household incomes going backwards.

Abolishing an entire tax bracket, 37c in the dollar, currently levied on those earning from $45,000 to $180,000, and reducing it to 30c in the dollar (up to a new income threshold of $200,000) would relieve cost-of-living pressures. That is especially important in major cities, where home prices and rents are exorbitant. Analysis by The Australian shows a wage earner on $120,000 – not a princely income, especially in Sydney and Melbourne – will be $1875 worse off in 2024-25 if stage three is scrapped. A family with two wage earners bringing home $120,000 and $80,000 would be $2750 poorer. Add in housing, possible school fees, energy and health costs, and family budgets are under heavy pressure.

Given the $50bn budget boost since March from strong commodity returns, a post-2024 tax grab cannot be justified. Labor MPs, the Greens and union bosses who want the cuts abandoned want more spending and redistribution, not fiscal rectitude. Ms McManus wants higher pay for care workers and handouts to households. Northern Territory Labor MP Marion Scrymgour, who wants Dr Chalmers to finalise his position on the cuts by the October 25 budget, also wants spending on cost-of-living relief. In her view, government knows better than workers how to spend their own hard-earned money. We disagree.

Failure to deliver the cuts from July 2024, as promised, would be bad for the economy and blatantly unfair. The current wage-tax system provides little incentive for pay-as-you-earn taxpayers to study, work or undertake new enterprises to better their financial positions. This is bad for productivity. Withholding the money and redistributing it also would be blatantly unfair to 2.5 million workers earning as little as $90,000 a year. For too long, too many of them have been going backwards as a result of bracket creep. Under the nation’s rapacious personal income tax system, any pay rises have been devoured by the government as workers move into higher brackets.

Under Australia’s highly progressive tax system, far from “turbocharging inequality”, as Greens leader Adam Bandt wrongly claims, the nation’s top 10 per cent of earners would continue to shoulder the major income tax burden after stage three. Rich Insights principal Chris Richardson has calculated that ­removing the stage three cuts entirely would leave the top 10 per cent of income earners paying 44.6 per cent of total tax. That is lower than the 45.1 per cent they will pay if stage three proceeds. That may seem counterintuitive. But in fact the package would benefit 75 per cent of taxpayers. Tax relief for those further down the income scale than the top 10 per cent would leave the top group paying a slightly higher share of the overall tax take.

If the Prime Minister caves in to colleagues’ desire to spend rather than leave most taxpayers with more of their own money he can expect the support of Greens and other crossbench senators. It is Mr Albanese and the government, however, that would wear the consequences, just as Julia Gillard wore her broken carbon tax promise, also courtesy of the Greens. With $243.5bn at stake between 2024 and 2032-33, the issue will be a turning point between enterprise and incentive on the one hand and big-tax/big-spending socialism on the other. The wrong decision would fulfil Josh Frydenberg’s prediction to parliament in February when he said Mr Albanese “can’t be trusted to implement our legislated tax cuts for families”. If that proved true, it would be a significant blow against aspirational, middle Australia. Once broken, political trust on important issues is hard to regain.