Activity 10g: Stage 3 Tax Cuts and Tax Reform
- The changes saw higher income earners; that is, those earning $200,000 or more per year, getting $4546 less than proposed initially under Stage 3. This allowed the government to redistribute these funds to lower and middle-income earners, with those earning between $50,000 and $130,000 getting $804 more than initially proposed.
- The Albanese Government argued that it was necessary to provide cost-of-living pressure relief for lower and middle-income earners, given the high levels of inflation that plagued Australia during the recent period.
- ‘Bracket creep’ or ‘fiscal drag’ is a phenomenon linked to inflation and the progressive nature of Australia’s personal income tax system. When inflation rises taxpayers seek an increase to their nominal incomes (money wages) to protect their real incomes (purchasing power) from the effects of inflation. However, this typically pushes taxpayers into a higher tax bracket where they are subjected to a higher marginal tax rate. It results in taxpayers paying a higher average rate of tax on any given level of income and is a boon for the government, as it increases total tax revenue.
- Growth in productivity results in lower costs/higher profit margins, which provide incentives for businesses to raise supply and ultimately result in lower prices over time. This not only provides a boost to living standards to the extent that cost of living pressures are relieved, but it also contributes to stronger economic growth (e.g. via a boost to international competitiveness), which leads to greater employment in the long term and higher incomes. Accordingly, the ability for households on average to purchase goods and services is likely to rise.
- The original version of Stage 3 tax cuts involved abolishing an entire tax bracket and creating a new tax bracket stretching from $45,000 to $200,000. Taxpayers, the majority of whom fall into this tax bracket, would be subject to a marginal tax rate of 30 per cent between incomes of $45,000 and $200,000. By eliminating an entire tax bracket and by extension a marginal tax rate, it minimizes the extent of bracket creep as an entire bracket is removed as the tax system flattens. As a consequence, taxpayers can retain more of their income given that they only move to a higher marginal rate once their income reaches a relatively high $200,000. This incentivizes people to work or, more importantly, to work harder (lift productivity) as they get to keep more of the income they earn.
- Given that direct taxes account for 62 per cent of total tax revenues compared to an average of 34 per cent among OECD nations, this suggests that we have an over-reliance on direct taxes relative to many other countries. Relatively high marginal tax rates on personal income can distort decisions to work and/or work hard, given that the government takes a greater portion of any given level of income. In addition, relatively high rates of direct company tax undermine business decisions to invest, reducing business Investment. The combined effect of reduced incentives to work and a reduction in business investment both lead to a decrease in productivity. Wage and salary earners will be less inclined to increase their effort at workplaces, thereby reducing growth in labour productivity. Lower levels of business investment in capital have a negative impact on capital productivity. These factors tend to raise costs of production and prices above what could exist, which negatively impacts international competitiveness. This, in turn, has a negative impact on aggregate demand over time and results in a lower rate of economic growth than would otherwise be the case.
- The current top marginal tax rate is 47 per cent (including the Medicare levy), which is above the median for comparable countries and kicks in at a relatively low multiple of average weekly earnings. As the top 3.6% of taxpayers contribute around 32% of income tax, and the top 10% of taxpayers nearly 50%, this acts as a barrier to work/productivity. In addition, the progressive nature of the tax system, with several brackets as a feature, contributes to bracket creep/fiscal drag that, if left unaddressed, further penalises working Australians.
- This is because the ageing population results in relatively younger Australians bearing the burden of future taxation, which in itself will need to be higher than otherwise, given the growth in health-related spending. This has the potential to overburden younger workers, as they will be required to pay higher taxes to support older Australians.
- By reducing direct income taxes and replacing them with higher rates of indirect taxes, household incentives will be altered. Householders will be more incentivised to work and generate income and less incentivised to undertake consumption. This will encourage investment over time and a more sustained increase in economic growth.