The government’s income tax plan will gift Australia’s top income earners more than $33bn in benefits, according to a new economic analysis from the Australia Institute.
The unlegislated income tax package will be one of the Morrison government’s first priorities when parliament resumes next month. Scott Morrison and the treasurer, Josh Frydenberg, have already made it clear that the $158bn package is an all-or-nothing deal.
That attitude is designed to wedge Labor and the crossbench into passing the tax cuts for higher income earners, designed to hit the budget in 2024-25, if lower and middle income earners are to receive their tax cuts in the shorter term.
The government avoided putting a cost on the third tranche of its tax plan during the election, dismissing repeated questions on the matter by pointing to the short term benefits for low and middle income earners. For those who earn less than $120,000 to receive the full tax cuts promised by the government, which include a rebate of $,1080 for eligible earners, the second and third tranche aimed at lowering the tax burden for the nation’s top earners also has to be passed.
The Australia Institute’s senior economist, Matt Grudoff, has put the cost of the third stage at $33bn over five years, for those earning $180,000, as part of a new distributional analysis, which also shows those earning more than $200,000 will receive a $26bn benefit over the same time frame.
The unlegislated income tax cuts which make up the first stage of the tax plan for low and middle income earners are estimated to cost the budget $15bn over four years from the next financial year.
With the national accounts showing the economy continues to slow, with growth at its lowest level since the global financial crisis, Grudoff said any tax relief packaged needed to be “well targeted if they are to maximise economic growth”.
“Low- and middle-income taxpayers are more likely than high-income taxpayers to spend their tax cuts and stimulate the economy,” he said.
“The increased low and middle income tax offset in stage one (a) will cost the budget less money and proportionately benefit more people than Stage 3(a).
“The stage 3(a) income tax cut is expected to cost the budget $95bn over five years.
“The government will spend more on this part of the tax cut than it is expected to spend on the pharmaceutical benefits scheme over the same period.”
Grudoff recommended the government abandon its stage-three tax cuts, a notion it has so far refused to entertain.
“Legislating our personal income tax plan in full – I underscore, in full – will be the first substantive business in the new parliament,” Morrison said late last week during a visit to Singapore
The government has claimed it has a mandate to pass its full suite of tax cuts, but the Labor leader, Anthony Albanese, said the opposition had not yet decided on a final position.
During the election, an Australia Institute analysis found high income earners would benefit from $77bn in tax cuts, based on both the legislated and unlegislated tax package plan.
While the Coalition’s likely 77-seat win in the 46th parliament will give it a lower house majority, it will need the support of either Labor or members of the crossbench to pass legislation in the Senate.
Centre Alliance’s Rex Patrick said his party would not come to the table without assurances there would not be cuts to essential services to pay for the tax plan.
The Grattan Institute released analysis during the election which outlined the government would be forced into making $40bn in spending cuts to meet its forecast surplus and tax cut promises, which the government immediately rejected.
Patrick said while he supports the first two parts of the tax plan, the third, aimed at those earning more than $180,000 had caused both him, and colleague Stirling Griff to hesitate.
“We have concerns that if the economy softens, then we’ll end up in a situation where we have a lack of revenue to support essential services such as education, health, aged care and pensioner support,” Patrick told Sky News on Sunday.
“That’s the due diligence that we’re going through at this point in time.”
Labor is due to reach its final position before parliament meets for the first time early next month.
The unlegislated tax plan explained:
Stage 1(a): This increases the amount of money available through the low and middle income tax offset, increasing the maximum payment from $530 to $1080.
Stage 2(a): This stage is due to come into effect in 2022-23. It increases the low income tax offset further from $645 to $70. The 19% marginal tax threshold is increased from $41,000 to $45,000.
Stage 3(a): This stage decreases the 32.5% personal income tax rate to a flat tax of 30% for people earning between $40,000 and $200,000.