Wealthy Australians are being “overcompensated” for the scourge of bracket creep, according to a new analysis that makes the case for delaying income tax cuts for the rich.
The Australia Institute on Monday released its analysis as the Labor Party keeps its options open on the “economically irresponsible” Stage 3 tax cuts in 2024.
When then-treasurer Scott Morrison unveiled his plan a year ago, he promised to “run a sword” through bracket creep.
The Australia Institute research suggests someone earning $200,000 a year is being overcompensated for bracket creep by up to $20,000 a year under the proposed tax cuts.
“The government’s income tax plan gives most of the tax cut benefit to the highest tax brackets. These high-income individuals are already the most overcompensated,” the institute’s senior economist Matt Grudnoff said.
“Given that bracket creep is regressive, these top tax brackets require the least compensation, not the most,” he said.
“If the government were concerned about bracket creep in future years, then its focus should be on the 32.5 per cent tax bracket, which spans incomes of $37,000 to $87,000.”
The plan doesn’t “abolish bracket creep”, as some have suggested, because to do this the government would need to index the income thresholds to inflation.
The analysis considers the effect of bracket creep over 25 years to consider what the tax rate would be if it was stripped out of the system.
But the Australia Institute research finds that all income levels are overcompensated for bracket creep if the 2024 tax cuts are in place.
“Someone earning $60,000 a year is $1919 a year better off when compared to the bracket creep baseline,” the report finds.
“Someone on $125,000 is $7035 better off than our bracket creep baseline. Someone on $200,000 is $19,785 better off than our bracket creep baseline,” it states.
On Monday, Mr Albanese outlined his proposal to bring forward a tax cut for all workers earning over $90,000 but delaying consideration on the Stage 3 tax cuts.
The New Daily has confirmed shadow cabinet made no formal decision to vote against the entire $158 billion package if these amendments fail.
“We haven’t ruled it out. We haven’t had a discussion about Stage 3,” Labor frontbencher Catherine King told ABC TV’s Q&A on Monday night.
Labor may still decide not to insist on the amendments, so it does not vote against the tax relief.
Several frontbenchers still don’t want to vote against the tax cuts if this approach fails.
“You can’t deny the punters a tax cut from Opposition, particularly so soon after an election where we had our backsides kicked,” Labor frontbencher Joel Fitzgibbon said.
“And we can’t afford to give our political opponents the opportunity to blame us for a bad economy,” he added.
“The only option then, if we are unable to force a decoupling – which should be our first objective – is to support the whole package or support none of it.”
Mr Albanese’s plan was backed by former leader Bill Shorten, who phoned from Bali where he is on holiday with his family.
“We think that Stage 3, at a cost of some $95 billion down the track for an economy which is very soft at the moment, which no one can say what the economy looks like in 2024-25, is really a triumph of hope over economic reality,” he said.
Finance Minister Mathias Cormann immediately rejected Labor’s olive branch to back only the first two stages.
“We will not split our plan to deliver income tax relief to all working Australians,” Senator Cormann said.
“Labor have still not learnt the lessons from the election.”
Treasurer Josh Frydenberg said: “Earth to Labor. You lost the election. The Australian people voted for our tax cuts, not your tax hikes. We’re not splitting our tax plan.”
Earth to Labor. You lost the election. The Aust people voted for our tax cuts not your tax hikes. We're not splitting our tax plan. It's time @AlboMP passed the tax cuts in full as @fitzhunter said today “you can’t deny the punters a tax cut from opposition."
— Josh Frydenberg (@JoshFrydenberg) June 24, 2019
The decision appears to put the fate of the tax cuts with the crossbench and Centre Alliance.
Centre Alliance Senator Rex Patrick said he had not had any discussions with Labor about the proposal to bring forward tax relief but delay Stage 3.
“They certainly haven’t discussed these specific measures with us,” Senator Patrick told The New Daily.
Stage 1 of the tax cuts, which Labor backed during the election, doubles the end-of-year rebate from $530 to $1080 for all workers earning under $126,000.
It is to be paid from July 1 when workers lodge tax returns, but only when the legislation passes.
Stage 2 increases the income threshold for the 32.5 cent rate from $90,000 to $100,000. It was scheduled to begin in 2022.
By bringing this forward to July 1, workers earning over $90,000 would secure a tax cut of up to $1350 three years earlier than expected.
Stage 3 would drop the 32.5 cent tax rate to 30 cents.
The Morrison government has legislated the abolition of the 37 cent tax rate in 2024, which means that the combination of both those measures would ensure the majority of workers face a tax rate of 30 cents in the dollar from 2024.
“We need action now and some of the government’s proposals, of course, are off in the never never,” Mr Albanese said.
According to the Pre-Election Fiscal Outlook, the forecast surplus for 2019-20 is $7 billion, which means bringing forward the tax cuts would halve that amount before the proposed infrastructure spending was included.
“The third thing that we’re saying is the infrastructure investment should be brought forward. This has been proposed by the Reserve Bank of Australia,” Mr Albanese said.