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Stage three tax cuts cost rises in post-pandemic jobs and wages surprise

More people in work, a surge in migrants and robust wages growth has produced a boom in the tax take, some of which will be returned from July next year to workers.

Jim Chalmers says an important fact people forget is that the stage three tax cuts will kick in at incomes of $45,000 a year. Picture: NCA Newswire / Gaye Gerard
Jim Chalmers says an important fact people forget is that the stage three tax cuts will kick in at incomes of $45,000 a year. Picture: NCA Newswire / Gaye Gerard

Wage inflation and a robust labour market have increased the annual cost of the stage three tax cuts, according to the Parliamentary Budget Office.

In an analysis for the Greens, the PBO has for the first time estimated the 10-year cost of the cuts, to begin in July 2024, as $313bn.

Previous estimates by the independent PBO have covered only the first eight and nine years of the tax changes announced in 2018 and 2019 by the former Coalition government.

Jim Chalmers last week revealed the tax cuts, which will flow to workers earning more than $45,000, will be $69bn over the first three years of operation.

An estimate by the PBO last July for Greens leader Adam Bandt valued the tax cuts at $61bn in their first three years.

But the strength of the labour market and recovery in wages growth have changed the parameters, via a bracket creep effect where the tax flattening of the stage three measures ensures a greater-than-anticipated return to taxpayers.

Employment growth has exceeded budget forecasts by around one percentage point in each of the past two years, while wage growth has also been more robust than Treasury expected.

Hence, the tax take from workers is projected to be much higher than previously forecast.

Last week’s budget papers show nominal growth in the compensation of employees in the two years before the 2024-25 financial year will grow by a cumulative 14.75 per cent in nominal terms.

At last year’s March budget, compensation of employees was forecast to grow by 11.5 per cent in those two years.

As well, the budget papers show personal income tax for the current financial year is likely to total $297bn.

In the Coalition’s final budget, Treasury estimated personal income tax collected this financial year would be $264bn, or $33bn less than what will now likely flow into Canberra’s coffers.

The one-year personal income tax collection upgrade for next financial year, before stage three takes effect, is $30bn.

In recent days, the Treasurer and Anthony Albanese have highlighted that the stage three tax cuts will apply to people earning $45,000 a year, or roughly half the average wage, a fact they said was not widely appreciated.

The stage three cuts involve removing the $120,000- $180,000 tax bracket of 37 per cent; increasing the top tax bracket threshold from $180,000 to $200,000, and; reducing the marginal rate faced by the $45,000-$200,000 bracket from 32 per cent to 30 per cent.

The PBO analysis shows over 10 years, 73 per cent of the tax cuts would go to people in the top income quintile (which in 2024-25 is people earning $111,100 or more).

According to the Australian Taxation Office, those earning above $180,000 a year, around 5 per cent of workers, pay almost one-third of all personal income tax collected.

Mr Bandt said “Labor’s tax cuts for the rich are ripping money away from everyone else”.

Analysis has shown the tax cuts will return bracket creep for a time, but by the midpoint of the 10-year cycle, fiscal drag will outweigh the benefits to taxpayers.

Tom Dusevic
Tom DusevicPolicy Editor

Tom Dusevic writes commentary and analysis on economic policy, social issues and new ideas to deal with the nation’s most pressing challenges. He has been The Australian’s national chief reporter, chief leader writer, editorial page editor, opinion editor, economics writer and first social affairs correspondent. Dusevic won a Walkley Award for commentary and the Citi Journalism Award for Excellence. He is the author of the memoir Whole Wild World and holds degrees in Arts and Economics from the University of Sydney.

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Original URL: https://www.theaustralian.com.au/nation/politics/stage-three-tax-cuts-cost-rises-in-postpandemic-jobs-and-wages-surprise/news-story/94b329ba01beec173e66b6153e695f27