Tax cuts political article of faith

However controversial the stage-three tax cuts were when legislated by the Coalition in July 2019, they should now be an article of faith among all mainstream politicians with the good of productive workers at heart. In the national interest, they must be implemented in 5½ months, in full. Trade unions, Senate crossbenchers, the Greens and some Albanese government MPs calling for the cuts to be scrapped or watered down are effectively advocating a sharp tax rise to penalise the nation’s most productive workers, who have long shouldered the lion’s share of the tax burden. Backtracking on the promise of implementing the stage-three cuts, which was central to Anthony Albanese’s electoral pitch in 2022, would dampen incentive among workers, to the detriment of the economy and productivity.

The reforms are neither radical nor regressive, but necessary, with millions of average wage earners to be returned almost six years of bracket creep worth up to $1300 a year. Nor are the reforms unfair to lower-income earners, who received major tax relief in stage one of the reform process, from the 2018-19 tax year. Stage three will flatten tax rates, abolishing the 37 per cent bracket that currently applies to income earned between $120,000 and $180,000. Instead, a 30 per cent taxation rate will apply to all earnings between $45,000 and $200,000.

Even after stage-three cuts come into effect, new analysis by the opposition suggests tax rates for average full-time wage earners would remain higher than they were under the Howard government. Almost 700,000 workers now fall into the highest tax bracket since the threshold was last raised to $180,001 in 2009, political editor Simon Benson reports. At that time, the threshold captured just 184,167 earners. Bracket creep is “like the thief in the night … the tax increase Australians never voted for’’, Angus Taylor writes on Monday.

Opponents of the stage three-tax cuts complain they will cost the budget more than $230bn over the next decade. That money, the Coalition argues, is owed back to those who earned it because the money was taken from them through bracket creep, which the cuts were designed to address.

Opinions among economists are divided about the potential impact of stage three on inflation. Independent economist Chris Richardson said last week the cuts could be inflationary, equivalent to “two to three rate cuts arriving in mid-2024”. He said the most likely implication was that interest rate cuts would come later than expected. That view has been disputed by other economists, such as those at JP Morgan, which has released analysis showing the tax cuts would have a negligible effect on inflation. While Jim Chalmers says the Treasury has not provided analysis on any inflationary impacts of the tax cuts, it is implied that the tax cuts have been already factored into the department’s forecasts for inflation. The Treasurer has also said that bracket creep was a priority for the government in assessing fairness in the tax system.

While opponents of the stage-three cuts have characterised the reforms as tax breaks for the wealthy, analysis from the independent parliamentary budget watchdog, commissioned by Liberal senator Andrew Bragg last June, revealed that middle Australians stand to benefit significantly from the changes. A worker earning the average estimated annual full-time wage of $105,000 in 2024-25 would pay $25,122 in income tax following the implementation of stage three, compared to $26,617 if the changes did not go ahead, the PBO calculated. Aside from short-term considerations, such as politics, growing the economic pie matters. For that reason, stage-three tax cuts will serve the economy well.