When the treasurer, Jim Chalmers, fronted the National Press Club the day after the budget in May, he was peppered with questions about stage-three income tax cuts.
Are the tax cuts, set to cost $313bn over a decade, being paid for with more government debt? Would Chalmers guarantee they would not be repealed? Do people earning more than $120,000, the biggest beneficiaries, really need to be compensated for “bracket creep”?
All reasonable questions, dispatched with insistence that there has been no change in Labor’s position on the cuts, which are legislated to take effect in July 2024.
Fast-forward to this week’s release of the intergenerational report (IGR) and you get a very good sense why the government is not contemplating income tax changes.
The report projects that unless the government intervenes to further cut taxes, personal income tax will grow from 50.5% of total tax receipts in 2022–23 to 58.4% in 2062–63. The IGR assumes that the tax to GDP ratio stays the same, and income taxes pick up the slack as fuel excise and some other taxes decline.
“Increases in nominal wages result in increasing average personal tax rates over time as a higher proportion of an individual taxpayer’s income is paid at the highest marginal tax bracket applicable to them,” it says, giving the textbook definition of “bracket creep”.
As Chalmers has noted though, stage three will in part give “back some of this bracket creep” and “governments into the future will make those sorts of decisions as well”.
Get the picture? Despite the massive cost of stage three, to prevent workers paying an ever-growing share of the total tax take in the medium to long term what will be needed is more income tax cuts.
Of course most proposals to revamp stage three do not involve scrapping the tax cuts altogether but tinkering to make them fairer and more progressive.
For example we could retain the 37% tax bracket, which now kicks in at $120,000, instead of abolishing it so that everyone earning between $45,000 and $200,000 pays the same marginal rate.
This was the essence of United Workers Union secretary Tim Kennedy’s suggestion when he called for a review of stage three ahead of Labor’s national conference.
At the conference Labor bared its internal dissent on Aukus but the proposed stage three motion was quietly shelved in name of party unity and assisting its re-election. The construction union fared a little better on other measures, opening the door just a crack to the possibility of taxing corporate profits.
From the Albanese government’s perspective: why bother tinkering with stage three?
The opposition leader, Peter Dutton, has already elevated retaining stage three to the status of a core promise that should see the government voted out if broken. You’d expect the issue would be prosecuted just as vigorously by whoever is opposition leader after the next election, at a time people will have started to receive the cuts.
Anthony Albanese personally puts a lot of stock in keeping election promises, including this one.
Labor’s experience is that voters hate the feeling of something being taken away from them, and are unlikely to forgive that even if they’re promised something else of equal or even greater value.
If this cognitive bias, known as “loss aversion”, didn’t apply to politics, we might be in the second term of a Bill Shorten government, with Labor re-elected after savings from cutting negative gearing, capital gains tax and franking credit rebates had been redistributed to the masses.
Also, consider the sums. Given adult full-time average earnings are about $95,600 and the budget projects nominal wages growth of 4% in 2023-24, by the time the tax cuts take effect the average full-time worker will be earning $99,400.
That’s basically the tipping point of $100,000 at which stage-three tax cuts more than compensate for the loss of the low and middle-income tax offset, which expired this year.
Yes, those on higher incomes will get much more. Labor would’ve preferred a more progressive system if it had its way when it tried to remove stage three in mid 2019.
As The Australia Institute chief economist and Guardian Australia columnist, Greg Jericho, has noted, stage three addresses bracket creep for the wealthy. There are better ways to help low income earners, such as raising the tax free threshold or lowering the rate for the poorest bracket.
But the progressivity of the income tax system can be addressed in future rounds of reform.
Labor wants to take tax reform on in bite-size chunks. For the moment, that means getting its petroleum resource rent tax changes through the Senate, addressing multinational tax avoidance, and legislating its cut to tax concessions on earnings from super balances of more than $3m.
In Chalmers’ answers to the press club on Thursday there were hints about where the next nibbles will come. Retirees are being “more frugal than they need to be”, he said, hinting at changes to encourage them to spend more of their super rather than pass it on as inheritance.
The employment white paper “will engage with work incentives, but primarily from the point of view of [minister for social services] Amanda Rishworth’s portfolio”. That sounds like letting income support recipients keep more as they earn more, an idea Rishworth never ruled out when raised by the Coalition.
Chalmers also left the door open to road-user charging, to make up for declining fuel excise tax.
But as the government nibbles away, it’s clear from the treasurer’s response to the IGR that revamping stage three is a mouthful that’s simply too big to swallow.
