The stage-three tax cuts could be renovated to save the budget up to $130bn while still delivering bigger tax cuts to 80% of income earners, according to the Australia Institute.
The progressive thinktank has released a report modelling four alternatives to the controversial tax cuts, finding they could save between $70bn and $130bn. Those savings are enough to lift the jobseeker payment to the rate of the age pension while still making a net improvement to the budget bottom line.
The Greens and crossbench have urged Labor to reconsider the stage-three tax cuts, which will reduce tax revenue by $320bn over 10 years, citing the fact the greatest benefit flows to high-income earners.
The treasurer, Jim Chalmers, has insisted there is no change to Labor’s plan to leave the tax cuts in place, arguing they help return bracket creep as income earners face higher rates of tax as they move into higher tax brackets.
The tax cuts, passed by the Morrison government in mid-2019, begin in July 2024. They remove the $120,000 to $180,000 tax bracket, increase the top tax bracket to $200,000 and reduce the marginal rate of tax for everyone earning between $45,000 and $200,000 to 30%.
All four alternatives modelled by the Australia Institute propose retaining the 37% tax bracket for income between $120,001 to $180,000, and to use other mechanisms to deliver bigger benefits to those earning less than $120,000.
The first alternative – to reduce the 32.5% rate to 29% for income between $45,001 and $120,000 – would save $130bn over a decade, it found.
The second – to reduce the 19% tax rate for income between $18,201 and $45,000 to 17%, and lower the 32.5% tax rate for income between $45,001 and $120,000 to 30% – would save $111bn.
The third alternative, to reduce the rate in the lowest tax bracket to 15% and the second lowest to 31%, would save $92bn.
The fourth, to reduce the rate in the lowest tax bracket to 18% and raise the threshold to $50,000, at which a 30% tax rate would apply, would save $70bn.
Under these alternatives, a person on today’s median annual income of $65,000 would be between $200 and $872 a year better off than under the stage-three tax cuts, the report said.
Someone on the current average full-time earnings of about $100,000 would be between $522 and $868 better off a year.
All taxpayers earning more than $132,400 would be worse off under the proposals; all taxpayers earning less than $124,600 are better off.
A high-income earner receiving $200,000 a year would be between $6,332 and $6,878 worse off, depending on which of the four proposals were adopted.
The Australia Institute used economic parameters from the parliamentary budget office’s “build your own budget” to estimate that stage-three will cost $377bn over a decade, $320bn of which is forgone revenue. The rest is interest expenses on borrowings to pay for them. It estimated raising jobseeker to the rate of the age pension would cost $70bn over a decade.
Greg Jericho, the chief economist at the Australia Institute and a Guardian Australia columnist, said “the stage 3 tax cuts are unfair and wasteful”.
“If the government remains committed to them, it must ensure they are fairer, and properly address bracket creep and the impacts of higher inflation,” he said.
“It does not have to be an all-or-nothing choice. There is a middle ground between delivering stage 3 as legislated under the Coalition and cancelling them altogether – ensuring more of the tax pie goes to workers who need it most.”
In September Chalmers acknowledged that the distribution of stage three was “contested” but noted that that the two earlier stages “had a different distribution” and primarily benefited low and middle-income earners.
Chalmers told the Guardian’s Australian Politics podcast it was a “very worthy aspiration” to “return some of the bracket creep” otherwise “people just find themselves higher and higher in the scales, which is good for the budget but not especially good for the worker”.
