Despite no change in policy, a debate about tax cuts has re-emerged again this week – the cause of the Albanese government’s first moment of disunity.
Perhaps it’s no surprise that economist Chris Richardson this week described the stage 3 tax cuts as “one of the hardest things in Australia to have a sensible conversation about”.
Here’s why.
Staged cuts
The stage-three tax cuts are the last in a three-step tax reform otherwise long since delivered.
The first two stages provided tax cuts to low- and middle-income earners.
Stage three will kick in during 2024. On net, it will benefit higher-income earners.
The package consists of measures to:
- Increase the income at which the top tax bracket begins from $180,001-$200,001
- Remove the 37 per cent bracket that previously applied to incomes from $120,001-$180,000
- Lower the income tax rate for the new bracket that extends from $45,001-$200,000 from 32.5 per cent to 30 per cent.
That represents a total of $243 billion to be taken out of the budget over the next decade.
For someone on $200,000 a year that’s an individual benefit of more than $9000.
In all about half, or 48 per cent, of the measure’s benefit will go to the less than 4 per cent of income earner on $180,000 or more.
Mr Richardson said complaints about the tax cuts’ fairness are “overstated” and ignore their indivisible role in laying the groundwork for lower and middle-income cuts.
“Although stage three does benefit the top 10 per cent, it actually delivers tax cuts to the top 78 per cent of taxpayers,” he said on social media this week.
It nonetheless diminishes a principle important to some on the left of politics: It makes taxation less progressive by reducing the relative burden of the wealthy more than the poor’s.
Why so difficult for Labor?
In Parliament, Labor backed stages one and two of the Coalition’s tax cuts but opposed stage three.
In 2019 Labor voted for the third component after former prime minister Scott Morrison tied it to a tax relief measure for lower-income earners.
Prime Minister Anthony Albanese and Treasurer Jim Chalmers reaffirmed a vow to ensure the tax cuts lasted for the term of government.
“We were in a situation of all-or-nothing at the time,” the PM said in a recent Press Club address.
“We voted for tax cuts because to vote against the package would have been voting against tax cuts, including for people who desperately needed it at the time.”
But calls for change continued and have grown louder in recent weeks, citing the need to repair the federal budget amid rising inflation and the worsening of economic conditions.
What has changed?
The tax cuts start five years after they were voted for: Since the intervention of the global pandemic and the addition of $1 trillion in spending.
Another factor previously ignored by agreement from both sides of politics is a structural deficit – the budget spends more on programs than the government brings in through revenue.
In the lead up to Labor’s first mini-budget, Dr Chalmers and Finance Minister Katy Gallagher made a point about this structural problem, saying it was caused by persistent increases in expenditure on defence, the NDIS and rising debt repayments.
In remarks some believed were aimed squarely at the tax cut, the Treasurer said the budget had to become more “responsible, more affordable, more sustainable”.
If it keeps the cuts, Labor has the option of reforming them to become a more progressive measure by 2024 or focusing energies on a sweeping tax review perhaps aimed at the widening crack in Australia’s fiscal foundations.
Why do we care?
Labor would face what voices on either side of the party say are damaging blows to its reputation: Losing its credibility by breaking a promise or governing without a purpose if it allows its budgets in government to be defined by Coalition policy.
Promise keeping
A Labor MP who rushed to urge the government to stick to the tax cuts, Mike Freelander, said people on $200,000 benefiting from the cuts were “well off, not wealthy”.
“We’ve made promises, and we need to stick to them,” he said.
“People have planned on the promises we made, and I think we should stick with them.”
And in recent governments, it has been a blow to the PM’s own trustworthiness that has sometimes been most devastating.
Tony Abbott’s credibility was an issue soon after he assumed office on a promise of no cuts to health or education, before embarking on a poorly received and ambitious program of budget reform.
He, in turn, brought Julia Gillard’s honesty into question because she promised not to impose a carbon tax if she won an election.
The former PM did not contest opposition attempts to paint a market mechanism for carbon trading as a ‘carbon tax’, and the result trailed her leadership.
A study by the Political Science Association showed parties can make hundreds of promises but are held accountable by voters to those they break especially if it has been central to their platform.
Vision
It might have been the alleged deception that did in Mr Abbott, but for Kevin Rudd it was news that he would defer establishing an emissions trading scheme that came before a plummet in the polls.
Mr Rudd had described global warming as the “greatest moral challenge of our age”.
What followed was described not as a case of a broken or delayed election promise but a deeper hole in his character.
And it was only a concern about a lack of belief at his core that made Scott Morrison vulnerable to ridicule about being from marketing or the suggestion he had governed only “wanting to keep his a–e” in the prime ministerial limousine.
For Labor, the tax cuts go to this directly in two ways.
They take up to $20 billion from the budget when it is tightening and constrain Labor’s ability to adopt new policies, or in even a lightly reformist sense, to govern.
Professor John Quiggin from the University of Queensland told TND after the election Labor risked being criticised as having won power to ensure “lower- to lower middle-income earners get screwed, and the money goes to the rich”.
That could leave Labor particularly vulnerable to desertion by a disenchanted base, or it could leave those who make up the base themselves vulnerable.
