The Morrison government’s stage 3 tax cuts are set to take effect from 2024 but are already attracting criticism from various quarters. The changes they would bring include shifting the lower limit on the top tax bracket that pays 45% from $180,000 to $200,000. It would also see those earning between $45,000 and $200,000 a year pay a standard 30% income tax rate. It is estimated that this would result in the government losing about $137 billion in tax revenue between 2024 to 2030.
The Labor party has opposed this move, proposing instead for the capping of the cuts at $180,000. The shadow treasurer, Jim Chambers, said that middle Australia was deserving of tax relief and that it did not make sense for the government to commit billions to the highest income earners, years into the future.
At the time of proposing such tax cuts, the government claimed it would help to stimulate consumer spending, a much-needed support to the national economy. Treasurer, Josh Frydenberg, has previously stated that stage 3 cuts would inspire Australians to work harder. He claimed rewarding effort would encourage aspiration as more of people’s hard-earned money was returned to them.
According to the Australian Institute’s senior economist, Matt Grudnoff, these benefits are not what they seem. He noted that several studies, including one done by the IMF, indicated that economies with lower inequality grew faster than those with high inequality. He said that tax systems were useful in combating inequality where high-income earners were the biggest contributors to the tax revenue. He added that the stage 3 tax cut would threaten this as those benefitting most were high-income earners.
Grudnoff pointed out that someone earning $45,000 was going to experience the same marginal tax rate as someone earning just under $200,000, yet these are wildly differing incomes. He emphasized his point by adding that the person earning $45,000 was in the bottom third of taxpayers, while the person earning $200,000 would be in the top 4%.
While the government suggests this move would stimulate the economy by providing more disposable income, Grudnoff says this impact is likely to be minimal from high-income earners who are more likely to save than spend. More so during recession periods that causes people to become more frugal. He has recommended that the government abandon stage 3 cuts entirely.
Research also suggests that the tax cuts would widen the gap in disposable incomes between men and women. Looking at the top 20% of taxpayers, men would take home more than half of the tax cut whereas women in the same grouping would receive less than 20%.
Many have already benefitted from the government’s stage 2 changes that saw adjustments to tax brackets that were applied from July of 2020. Amongst the changes was lifting of the upper limit of the bottom tax bracket that applies a 19% tax rate from $37,001 to $45,000. Those in the 32.5% tax bracket also saw the upper limit raised from $90,000 to $120,000.