Why Jim Chalmers cannot shy away from stage three tax cuts

As foreshadowed by some commentators prior to the budget, the Treasurer doubled down on his softly, softly approach to fiscal policy.

Whether he was motivated by the desire to deliver a surplus, or by concerns over announcing big spending programs with inflation way above the RBA’s band, the budget was marked by the lack of big reform vision.

While no plan is probably better than a plan that involved another massive increase in government, it has left the space vacant for those who want to impose their own vision on the economy.

In particular, despite the government’s continual denial they would even consider it, those who wish to cancel the Stage 3 tax cuts have stepped into the void to offer their alternative economic agenda.

So confident are these advocates that they routinely claim ‘no-one could defend’ the tax cuts, and that they should be redirected to other priorities, especially in the welfare space.

Perhaps they believe if they repeat this enough times, it will become true. However, not only should Labor stay the course with the tax cuts, the consequences that would flow from  undoing them would extend well beyond the political fallout.

First, it is necessary to counter the claims of advocates determined to present the figures in as misleading a way as possible. Take the recent assertion that the cost of the tax cuts has blown out: this is only because those eligible for tax relief are now going to pay even more tax than expected.

With the total tax take increasing, the government will now have more revenue than expected after the cuts take effect. The logical interpretation of this should be that the cuts are more affordable — not less.

Another misleading claim is to pretend that the Stage 3 tax cuts are a stand-alone package and not the belated benefits finally trickling through six years after even else first saw their tax rates cut.

Second, by the time the changes are implemented it will be almost 15 years since the top tax bracket has been adjusted (excluding increases in the Medicare levy and the Temporary Budget Repair Levy).

Although inflation was mild for much of this period, bracket creep has steadily eroded the real value of the top tax threshold during that period, bringing it closer and closer to average wages. It has risen from just under three times full-time average earnings in 2010 to less than two times wages in November 2022 — adding more than 300,000 people to the top bracket.

Had the threshold been indexed to inflation, it would currently be more than $240,000. It would have been higher still if adjusted for average wage increases.

With inflation currently barrelling along at 7+% and wage growth surging past 3% on recent figures, bracket creep will begin to quickly bite into the top rate again despite the changes.

Bracket creep is a pernicious, hidden form of taxation. By its very nature it is unfair. The principle of progressive taxation is that you pay more as you earn more, but bracket creep makes you pay more even though your earnings stay the same in real terms.

The fact is that the government could fix the problem of bracket creep easily and cheaply (in the short term). If it indexed the tax brackets, then bracket creep would be abolished. There would be no outrage over a Stage 3 type tax package, because it would be unnecessary.

Some have argued that set brackets promote certainty, and retaining flexibility of tax changes in response to fiscal circumstances is beneficial. However, the real reason bracket creep hasn’t been fixed is that being able to announce tax cuts every few years is more politically favourable than hidden taxes are politically harmful.

When brought to their attention, it hard to see voters accepting that bracket creep is a good thing. Yet, those arguing against the Stage 3 package are effectively claiming that bracket creep is so self-evidently desirable that no-one could challenge it.

Are they seriously arguing that we should just never address bracket creep for those in the top quarter of the income distribution ever again?

Such a claim may seem a trifle absurd; but if we don’t address bracket creep now, when would be the right time?

The budget is currently in surplus, and Labor is claiming a significant improvement in the medium-term budget position (one that factors in the cost of the tax cuts).

Remember, this threshold and rate have been frozen in nominal terms for 15 years, while even Jobseeker has at least been indexed to inflation.

To put this in comparison for those claiming the recent increase in Jobseeker is nothing compared to the value of the tax cuts: this has meant that the Jobseeker rate has increased by more than 50% in nominal terms since 2010.

With the scheduled increase in September likely to coincide with another substantial rise from indexation, Jobseeker will have increased by approximately two-thirds between tax changes.

By contrast, someone on a $300,000 income will see a reduction in taxation of less than 10%.

The point is not to say that there is a moral equivalence in need between someone on Jobseeker and someone on $300,000, but that is not the only factor from a moral perspective.

The Stage 3 tax cuts will return some of the income unfairly taken from the person on $300,000. Over time, the value will diminish. The tax paid by the person earning $300,000, after the cuts, is almost enough to fully fund JobSeeker for five people.

The person earning $300,000 will, alone, fund the Treasurer’s $40 per fortnight increase for 92 people. The top sliver of the income distribution carries the tax burden for most of the country.

Perhaps, in the interests of fairness, we can lighten the load of the people who are carrying it for everyone at least once every 15 years.

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