It is fair to say I have not taken a neutral position on the stage-three tax cuts. After all, back in 2022 I was the guy who wrote: “The stage-three tax cuts are a pile of garbage, and everybody knows it.”
I distinctly remember the 2018 budget lock-up when the cuts first appeared. My jaw hit the floor when I realised the government was not only contemplating introducing a flat income tax, but was so brazen it hadn’t even provided any costings.
When the costings finally arrived (some four years later), they were big. The latest estimate released by the Parliamentary Budget Office this week estimated the cuts would cost $20.7bn in the first year.
But things got really ugly when you looked at who would have received most of the stage-three tax cuts. More than half ($11.2bn) was going to people earning more than $150,000 a year. All up, just over three-quarters of the cuts would benefit the richest 20%.
We were told the cuts would end bracket creep (they wouldn’t, given bracket creep affects low- and middle-income earners more than high-income earners). We were told the cuts would fire up productivity and participation (they wouldn’t, given the biggest tax cut was going to those on $200,000, and whose marginal tax rate of 45% wasn’t going to change at all).
And now they are gone.
Stage three is dead. Long live stage three new … better … improved … fairer?
The details are yet to be officially announced and even since this column was first published different things have been confirmed to the media. I’ve updated some of the dollar figures and graphs a few hours after publication to reflect the new details as they’ve become public.
Various media reports suggest the end result will be to:
reduce the lowest tax rate from 19% to 16%. The key aspect of this is unlike the stage-three tax cut, this means people earning less than $45,000 will get a tax cut of up to $804.
reduce the 32.5% tax rate to 30% (this is the same as the old stage three).
increase the 37% tax threshold from $120,000 to $135,000.
increase the 45% tax threshold from $180,000 to $190,000 (the old stage would have increased this to $200,00).
So what does this look like? First, the dollar amount of tax cuts:
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The median annual earnings for all Australian workers is now $67,600 – that is, half of our workers earn more and half earn less than that figure. This is the true “middle Australian worker”. They will be $804 better off under the new stage three than the old one – a $1,369 tax cut compared with $565.
The PBO estimates that 90% of income earners earn less than $153,000. Given that the new stage three is better for those earning less than $146,500 you can pretty confidently say that 85% of income earners are better off under this new stage-three arrangement.
That’s a pretty potent political weapon.
But now let’s look at the cut as a percentage of income.
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Those on the minimum wage of about $45,000, those on median earnings and even those on average full-time earnings of just under $100,000 all get much the same tax cut as do those on $200,000. The only bump is for those earning between $120,000 and $135,000 who get the benefit of the increased threshold.
And when we look at the share of the benefits, the new stage three gives more to the bottom nine income deciles (the lowest 90%). It does this by massively reducing the total amount going to the top 10%.
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The final result is a tax system that is much more progressive than would have been the case under the old stage-three cuts:
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The political fight will obviously be about breaking an election promise. But that can only get the Coalition so far. Complaining that because Labor broke a promise 90% of people are going to be better off is rather unconvincing.
Do they really think people on median and average incomes will be angry they are getting a bigger tax cut?
The bigger story is one of policy. Labor has a tax policy its members and ministers will be proud of. No longer will they have to cower. This is a Labor tax policy done by a government that looks as though it wants to be in charge.
I always argued against these tax cuts because they produced a less fair economy, which leads to a less fair Australia. I criticised Labor when it promised to keep the cuts. It was a bad policy whoever implemented the cuts.
The government is right to dump them and come up with something better for the economy, and the country.
Greg Jericho is a Guardian Australia columnist and policy director at the Centre for Future Work
This article was updated on January 25, 2024 to reflect changes in the dollar amounts of tax cuts after it was confirmed the tax-free threshold would not be raised.
