Turnbull’s plan for income tax cuts

The Turnbull government is planning to unveil personal income tax cuts before the next election.

Malcolm Turnbull arriving at the Business Council of Australia's annual dinner in Sydney last night. Picture: Hollie Adams

The Turnbull government is planning to unveil personal income tax cuts before the next election and believes it can achieve this without endangering the return to budget surplus in 2020-21.

Malcolm Turnbull told the Business Council of Australia last night that the government had tax reform ambitions beyond its promised company tax cuts.

“In the personal income tax space, I am also working with the Treasurer and my cabinet colleagues to ease the burden on ­middle-income Australians, while also meeting our commitment to return the budget to surplus,” the Prime Minister said.

His commitment comes as the International Monetary Fund calls on the government to embrace tax reform beyond its enterprise tax plan.

“A more comprehensive tax reform has the potential to increase efficiency of the tax system, increase investment and labour ­demand and reduce inequality,” the IMF reported yesterday at the conclusion of its annual mission to assess the Australian economy.

Mr Turnbull’s revelation of plans for personal income tax cuts comes as the government tries to wrest back control of the national political agenda after being diverted by the citizenship saga and the same-sex-marriage plebiscite over the past two months.

He said that “in times of uncertainty, the nation needs calm and measured leadership; a steady hand at the helm — even if it does result in people asking me why I am so calm”.

“So calm, composure, deliberation — that’s how we overcome our challenges, just as we have done ever since the election last year,” Mr Turnbull said.

His address to the Business Council emphasised the government’s determination to lower the company tax rate to 25 per cent over the next decade.

 

Mr Turnbull said the government’s goal for all Australians, both workers and employers, was “always to leave more money in your pocket, not in ours”, and it remained committed to tax reform.

“Just because we are in challenging fiscal times does not mean we should raise the white flag on making the tax system work better,” he said.

Mr Turnbull said personal ­income tax cuts would form part of the government’s efforts to relieve cost-of-living pressures.

“Another way of putting more money into people’s pockets is by increasing their disposable income through lower taxes,” he said.

The Coalition took its company tax cuts to last year’s federal ­election, without winning great popular support, and is looking to personal income tax cuts before the election due in 2019. Pressure for personal income tax cuts is growing as inflation pushes a ­larger share of wages into higher tax brackets. Besides a small tax cut last year by raising the threshold for the ­second top tax rate from $80,000 to $87,000, there have not been any personal income tax cuts since those introduced in 2011 as compensation for the Gillard government’s carbon tax.

Last year’s tax cut was more than offset this year by the increase in the Medicare levy from 2 per cent to 2.5 per cent from July 1, 2019, which is expected to raise more than $4 billion a year from personal taxpayers by 2020-21.

Analysis by the Parliamentary Budget Office has shown lower and middle-income earners are being hit hardest. It estimated a middle-­income earner would receive $6100 more in wages in 2020 than now, but would lose $2500, or 41 per cent, of that in tax.

Beyond highlighting a focus on “middle-income Australia”, Mr Turnbull did not give any details about the timing or the type of tax relief the government was considering. However, the midyear budget update, to be released next month, will show the budget balance is improving faster than expected when the May budget was released, providing the opportunity for tax cuts.

Deloitte Access Economics analysis suggests the forecast budget surplus of $7.4bn by 2020 would be sufficient to fund modest cuts for middle-income earners, by lowering the second bottom tax rate from 32.5c in the dollar to 30c, or by raising tax thresholds.

Deloitte partner Chris Richardson said cutting the second bottom tax rate would bring gains rising from $325 a year for someone earning $50,000 a year to $1250 a year for people earning more than $90,000. It would cost the budget $7.2bn in 2020-11.

An alternative strategy would raise the threshold at which the 32.5 per cent tax rate cuts in from $37,000 to $40,000 while also lifting the threshold for the 37 per cent tax rate from $87,000 to $90,000. This would bring tax savings of between $405 and $540 a year for people earning more than $40,000. It would cost the budget $4.2bn by 2020-21.

Mr Richardson said middle-­income earners were the largest cohort of taxpayers and voters, making it expensive to provide relief but politically costly to ignore.

Labor has not yet canvassed the possibility of personal income tax cuts in its platform, but its opposition to the rollout of the remainder of the government’s enterprise tax plan, which has a 10-year cost of $65bn, gives it the ability to out-gun the Coalition on tax relief.

The IMF said Australia’s economic recovery was “lagging” that of other major countries and urged the Reserve Bank to keep ­interest rates low to help boost wage and economic growth.