Labor has gone a long way towards shredding its credibility.
It was said of a particularly runout-prone cricketer that his first call for a run was not a statement of intent but merely an offer to open negotiations. So it is with politicians — especially those who have been around for a while — who tend to develop the ability to deny something in such a way as to leave open the possibility of still doing that same thing.
The Prime Minister has been displaying this ‘skill’ for some time around the Stage 3 Tax Cuts. His refusal to address the question for weeks on end, his repetition that the government’s position hadn’t changed, together with his oddly phrased claim that “tax cuts will happen in July”, seemed designed to fuel speculation that the government was considering changes to the legislated Stage 3 tax changes … until it confirmed that it was doing exactly that.
In defence of the Stage 3 changes as currently legislated, there are two particularly strong arguments worth articulating: one political and one economic.
The political argument is likely to resonate most closely with the government. The Stage 3 tax cuts were legislated five years ago with the support of both sides of politics. They were proposed by the Coalition prior to the 2019 election, who were returned to office, and at the 2022 election both Labor and Liberal committed to keeping them.
Though the government clearly found them distasteful, a commitment is a commitment. And in walking away from it, Labor has gone a long way towards shredding its credibility not just on taxation but on a wider range of issues. The government’s tortuous defence of the backflip is sheer humbug.
Julia Gillard’s government took significant political damage from breaking an election promise — more than was perhaps expected — but breaking election promises is hardly uncommon. However, Stage 3 was a settled piece of law that has been in place for a number of years; which the government reaffirmed repeatedly it wouldn’t change. Albanese’s government is gambling that its broken promise will be overlooked in majority opinion because the reshaped tax cuts deliver more money to most taxpayers. We shall see.
Then there is the economic argument, which Labor has been coy about making. It is a compelling argument based on the pernicious nature of bracket creep and on incentive. As a hidden form of tax increase, bracket creep is deeply unfair, and no less so for the so-called ‘rich’ than it is for those on lower incomes. It means your average tax rate goes up even if your earnings stay the same in real terms while rising in nominal terms.
The threshold for the 45 percent tax bracket has been $180,000 since 2008-09. Indexing it to the CPI would bring it to something like $270,000 in 2024-25. Compared with that, the Stage 3 increase to $200,000 was modest indeed.
The government has done nothing to ‘earn’ the windfall from bracket creep. It should return it. Better yet, it should abolish the creep by indexing the tax brackets every year.
Cutting tax rates or increasing bracket thresholds even in a way that is neutral to after-tax income distribution — such as through indexation —- inevitably delivers much larger dollar cuts for those on higher incomes who actually pay the most tax.
For this reason, there are plenty on the left of politics and within the government who advocated a reshaping or even abolition of the Stage 3 cuts. To these critics, there is never a right time reduce tax on high incomes.
On this occasion, the government has bent to their will by chopping back the tax cuts above $135,000 — without needing much encouragement. This is a triumph of the politics of envy and redistribution over the politics of aspiration and incentive.
Although the government finally came around to defending tax cuts as a fix for bracket creep, it has never articulated the case on grounds of incentive.
The creation of a wide 30 per cent band from $45,000 to $200,000 was the best feature of Stage 3 because of what it did for incentive, but it has been emasculated in the revised structure.
Despite the confidence of opponents of the Stage 3 cuts, their arguments for changing them have been poor. First they argued that the Stage 3 cuts are unfair because they mainly benefit higher income earners. However, the main reason for this is that Stages 1 and 2 disproportionately favoured lower and middle income earners. Stage 3 was delayed for a number of years but it was never intended as a stand-alone package.
That hasn’t stopped advocates claiming the benefits should be redistributed to other spending priorities.
Despite their obvious desire to spend all the benefits from culling Stage 3, this didn’t stop the same advocates claiming the budget couldn’t afford the cost.
But the outsized Stage 3 costings prepared by the PBO rely on the historically anomalous assumption that, despite bracket creep running almost unchecked for more than a decade, no relief would be coming for high income earners for another whole decade.
Oh, and — oops — the budget moved into surplus.
Now they want to argue that the Stage 3 cuts would drive inflation. If so, then redirecting money from higher income earners (who are likely to save a significant portion of the cuts) to lower income earners (who will increase consumption) will be even more inflationary.
The government actually has several important principles to protect here. First, it should keep its word. Second, taxation should require consent. As noted above, bracket creep is an unfair stealth tax.
The reality is that advocates for bigger government, such as the Greens and their allies, like bracket creep exactly because it’s a stealth tax that doesn’t require the consent of voters.
If you give voters the choice, they might say no.
Simon Cowan is Research Director, and Robert Carling is a Senior Fellow, at the Centre for Independent Studies.
Photo by David Peterson.