Stage 3 tax cuts blues for Albanese

The current uncertainty surrounding the Stage 3 tax cuts was both an entirely predictable and completely avoidable result of the unnecessarily long delay between Stages 2 and 3.

Perhaps the Coalition thought it was clever to hold the cuts hostage for votes at the recent election. Maybe they wanted the credit for tax reform without doing the work of paying for them.

Labor continues to insist the tax cuts will come into effect in July 2024; the line they took to the last election. This has upset those looking to fulfil their spending wishlist via the new government, and many on the left who wanted an immediate and bold declaration of tax-based war on ‘the rich’.

Unfortunately their ire is premature. The tax cuts are far from being safe: there is simply no reason for the government to do anything about them at the moment. With economic circumstances so volatile, and the fiscal impact still years away, why would they invite backlash by dumping the cuts now?

The danger time is the 2023 budget or even the 2024 budget prior to the next election, when the government can offset any criticism by outlining alternative policies they believe will be more appealing.

To be fair, Labor may well feel constrained by Julia Gillard’s negative experience with the carbon tax, especially given this was an election promise and the potentially odious parallels with the Greens’ leading the charge to overturn the legislation. There is some weight in this argument.

However, many will see fundamentally different circumstances this time. The then opposition successfully portrayed the carbon tax as a hip pocket issue for ordinary Australians.

By contrast, the phasing of the tax cuts program has allowed its opponents to focus on Stage 3 in isolation and paint it as an unfair benefit mostly for the ‘rich’, rather than the delayed culmination of a more comprehensive reform.

In fact, so confident have opponents of the cuts become, that a rather facetious argument is being advanced on social media that no good arguments can be made in defence of the tax cuts.

Not only is this claim itself unfair, the case for completing the package of tax reform is actually quite strong — both in terms of the benefits from it and its intrinsic fairness.

First, cutting taxes is not the same as increasing government spending. Cutting taxes leaves money earned by individuals in their pocket. Individuals have a stronger moral claim to the income they have earned than potential recipients of government spending — however much those on left want to make claims to the contrary.

The government is actually not entitled to an ever-growing percentage of everyone’s income simply to churn it through the welfare system or hand it out to vested interests and supposedly worthy recipients.

Second, the tax relief to those in higher tax brackets comes many years after similar cuts were directed to people in lower tax brackets. If anything in this package could be criticised as ‘trickle down’ it’s that tax cuts have finally trickled down to those who pay most of the tax.

What’s more, there was a time when fairness meant treating people equally: and the end result of the Stage 3 cuts is that most working people will face the same marginal tax rate.

Even so, those earning more will continue to pay both more tax and a higher percentage of their total income in tax, while those earning quite a bit more will also continue to face a higher marginal rate. The tax system will remain steeply progressive.

All of which is quite aside from arguments for lower income tax based on economic efficiency and resistance to the increasing size of government.

Moreover the real benefit from the tax cuts will be increasingly limited due to the impact of bracket creep. Bracket creep — where the government is effectively penalising individuals for the inflation the government itself stoked — is an especially insidious burden with inflation approaching 7%.

The unfairness argument has also been supersized by aggregating the cost of the cuts across 10 years to almost $250 billion.

Yet this, too, is quite overblown. The government will raise potentially as much as $7 trillion in total revenue over this period, with more than half coming from income tax. The cost of the tax cuts is less than 5% of revenue raised. And the quoted cost is a static estimate; making no allowance for the benefits from higher economic activity, employment and tax revenue flowing from the tax cuts.

When put in the proper context, the Stage 3 cuts are actually fairly modest. Given that the top 20% contributes more than 60% of all income tax, it actually isn’t unfair for that cohort to get a tax cut every now and then.

Despite this compelling logic, the government may well, at a minimum, significantly amend the package so they get the credit for the reforms — possibly by spreading the benefits to a wider group.

If the government wanted to put their own stamp on it, or to broaden the benefits, perhaps the best alternative is to index tax brackets the same way government benefits are indexed.

This would actually cost them nothing in real terms and, while it would be better for this to be coupled with the return of the last decade of bracket creep, indexation alone would be better than nothing.

Unfortunately, the more likely scenario is that they will reduce the size of the cut — if not completely abandon it — to fund their own spending proposals. Labor came into office with plans to increase spending and the groups with their hand out are only multiplying.

Either way, despite the current denials, the chances the Stage 3 tax cuts make it to implementation unchanged are far lower than you might think.

Simon Cowan is Research Director at the Centre for Independent Studies.