By Shane Wright
Anthony Albanese or Peter Dutton will have to offer sizeable personal income tax relief to prevent the value of stage 3 tax cuts being wiped away in as little as two years, amid warnings the long-awaited relief package will do little to strengthen the economy and the budget.
Research compiled for this masthead by the Australian National University’s Centre for Social Research and Methods shows average tax rates for 80 per cent of taxpayers will be back to their current levels or even higher by 2027.
Stage 3 tax cuts start from July 1 but their value will soon be wiped away by bracket creep.Credit: Marija Ercegovac
In dollar terms, a middle income earning household will be paying more income tax in 2025 than in the 2023-24 financial year despite the deep tax cuts that start from July 1.
The stage 3 cuts, first announced by then-treasurer Scott Morrison in his 2018-19 budget and rejigged by Treasurer Jim Chalmers in January, will deliver $23 billion across all taxpayers in their first year of operation. Over the next decade, they will reduce tax collections by more than $330 billion.
A person earning $50,000 will get a $929 annual tax cut or $17.87 a week. Someone earning $100,000 will get an extra $2179 a year or $41.90 a week, while people earning more than $190,000 will collect an additional $4529 annually or $87.10 a week.
Average tax rates have climbed since Morrison announced the package. The end of the low- and middle-income tax offset in 2022, a feature of the original plan, pushed average tax rates up to their highest levels since 1999.
All those tax rates will fall after stage 3 starts. According to the ANU centre, the average tax rate for the highest income households will drop from 25.2 per cent to 23.9 per cent from July 1. A middle-income earner’s average tax rate will edge down from 16.9 per cent to 15.5 per cent.
But average tax rates will start to climb in the 2025-26 financial year. Total tax paid across all people will be back at their current level in 2026.
Ben Phillips, the centre’s principal research fellow, believes that a future government will have to adjust tax thresholds because the burden of tax continues to grow despite the stage 3 cuts.
Based on his research, without any future cuts, the average tax rate on the top 20 per cent of taxpayers will have hit a record 25.8 per cent by 2033.
In percentage terms, the hardest hit if tax thresholds remain the same will be low- and middle-income earners. A household in the bottom 20 per cent of income earners faces a 42 per cent lift in their average tax rate, while someone earning around $155,000 by 2033 would have suffered a near-12 per cent increase in their tax hit.
Phillips said governments of all political persuasions had developed a habit of giving back bracket creep to taxpayers. Stage 3 was no different.
“Over the past 40 years, you see a change in the tax rates every couple of years. It’s billed as a great tax cut but it’s really just giving back bracket creep,” he said.
“I don’t believe there won’t be any more tax cuts before 2033. Every way you look at it, there has to be at least another round of tax cuts.”
While the stage 3 tax cuts at $23 billion are the largest on record in nominal dollar terms, as a share of GDP, at 0.8 per cent, they pale against others. John Howard’s tax cuts, to cover the impact of the introduction of the GST, were worth 1.7 per cent of GDP.
Paul Keating’s reforms of the mid-1980s, that included cutting the then top marginal rate of 60 per cent while introducing a capital gains tax, dividend imputation and the fringe benefits tax, were marginally smaller at 1.6 per cent of GDP.
Economist Richard Holden, from the UNSW Business School, believes the country needs a major overhaul of its entire tax system, describing the stage 3 cuts as nothing more than returning bracket creep.
He said tax thresholds should be indexed so people were not burdened by ever-increasing average tax rates, while the GST system should be radically overhauled.
An absence of real tax reform is holding back the economy, according to Richard Holden.Credit: Alex Ellinghausen
Holden believes the GST should be increased to 15 per cent with all taxpayers given a set cheque every month up to a value of $10,000 or $12,000 a year that they could spend on anything.
This would enable deep personal income tax cuts and swing the focus of tax collections to consumption.
“Compared to our overseas peers, we’re half as dependent on taxes on consumption and about twice as dependent on taxes on workers,” he said.
“We have a situation where we depend on the workforce to pay for all of the social programs that we want.”
Holden said the tax system affected incentives to enter workforce, particularly those on lower incomes who faced high effective marginal tax rates, and distorted the economy.
“We have falling birth rates and so we’re more dependent on immigration to provide the workforce that we need,” he said.
“That has a distortionary effect through the entire economy, starting with the housing market.”
Another issue around the stage 3 tax cuts is their impact on general economic activity. The package was put together before the COVID-19 pandemic and well ahead of the huge government and central bank stimulus that has fed into current inflationary pressures.
Economist Jo Masters believes the tax cuts may come in at the right time to stabilise the economy.Credit: Louie Douvis
Barrenjoey Capital Partners chief economist Jo Masters does not believe the tax cuts will unleash a wave of inflation.
“People have been talking about these tax cuts like it’s $23 billion all at once. It’s going to take two or three or four months until people really see them. I don’t think we’ll really know how they’ve played out until the end of the year,” she said.
“Depending on how much is saved, we could see about $4 billion spent out of the tax cuts. In a year of household spending worth $1.5 trillion, it doesn’t really move the dial.”
Masters said many people were stuffing any extra cash away in their redraw mortgage accounts rather than spending it.
She noted there’s a large difference between the stage 3 tax cuts and the $1500 low- and middle-income tax offset that was effectively a lump sum payment to many Australians, while the economic situation at present – with growth at just 0.1 per cent through the March quarter – was also very different.
“The economy is rolling over. Population growth, GDP, wages, inflation, household consumption have all rolled over. So it’s probably fortuitous that they’ve come in when they have,” she said.
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