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Why the narrative around stage 3 tax cuts is wrong

  • June 09 2021
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Why the narrative around stage 3 tax cuts is wrong

By Cameron Micallef
June 09 2021

As the debate around the government’s controversial stage 3 tax cuts continues, an economist reveals why ballooning taxes may not necessarily spell bad news for the Australian economy.

Why the narrative around stage 3 tax cuts is wrong

Why the narrative around stage 3 tax cuts is wrong

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  • June 09 2021
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As the debate around the government’s controversial stage 3 tax cuts continues, an economist reveals why ballooning taxes may not necessarily spell bad news for the Australian economy.

Why the narrative around stage 3 tax cuts is wrong

The current narrative around Australian politics is that tax cuts increase consumer spending, with stage 3 tax cuts said to be vital to supporting the national economy moving forward.

But the tax cuts, set to come into effect in 2024, are poised to cost the government $137 billion between 2024 and 2030, by applying a standard 30 per cent income tax rate to those who earn between $45,000 and $200,000 a year.

For those earning more than $200,000, the tax rate would remain at 45 per cent, which is the current going rate for those who pocket $180,000 and more.

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While Labor has long opposed the cuts, it is currently looking at capping the stage 3 cuts at $180,000 in a bid to save the government $80 billion.

“We do think that middle Australia deserves tax relief,” shadow treasurer Jim Chalmers previously said.

“We said at the time, and we’ve said ever since, that it didn’t make a lot of sense for the government to commit tens of billions of dollars to the highest-income earners some years down the track.”

Despite the Morrison government pushing the benefits of stage 3 tax cuts on the broader economy, Australian Institute senior economist Matt Grudnoff has argued that the narrative around the cuts is simply wrong.

During an interview with ABC’s Insiders, Treasurer Josh Frydenberg noted that stage 3 tax cuts inspire Australians to work harder.

“What you’re doing is you’re rewarding effort, you’re encouraging aspiration, you’re returning more people’s hard-earned money back to them,” he said.

However, Mr Grudnoff was quick to point out that numerous studies, including by the IMF, show that economies with lower inequality grow faster than economies with high inequality.

“The tax system is one of the best tools we have for fighting inequality as taxation revenue mainly comes from high-income earners. But the stage 3 tax cuts threaten this as they mainly go to high-income earners. These tax cuts will increase inequality,” he said.

“The argument that lower taxes on high-income earners are needed to make them work harder and longer is also wrong. There is no evidence that any CEO or other high-flyer has slackened because taxes are too high.”

While the income-tax scale becomes progressively higher depending on a person’s income, the government is arguing that flattening the curve removes bracket creep.

Prime Minister Scott Morrison argued back in 2018 when he was treasurer that removing bracket creep was part of his government’s seven-year plan, when the three-stage tax reform was first announced.

In the three years since, the government has stuck to the narrative.

Once again, Mr Grudnoff refuted these claims, highlighting that Australian taxpayers have been overcompensated for bracket creep and there is no need for further income tax cuts to reduce the effect.

“If we compare the impacts of inflation with the impact of income tax cuts, we can see that income tax cuts have been larger than inflation for income levels. The overcompensation is the largest the higher incomes become,” he said.

Finally, the government also pointed out that lowering taxes, including those in stage 3, will act as an economic stimulus due to increasing consumer spending.

In a move aimed to further shore up consumer spending, the government used the budget to extend the low and middle income tax offset, giving 10 million workers a tax cut of between $255 and $1,080, at a cost of $7.8 billion.

When asked what “growth dividend” the tax cuts would deliver, the Treasurer said they would “deliver a stronger economy over time”.

“What you’re doing is you’re rewarding effort, you’re encouraging aspiration, you’re returning more people’s hard-earned money back to them,” he said.

“You see economic growth through the years in our budget, including this year.”

Unsurprisingly, Mr Grudnoff disagreed with this narrative, pointing out that high-income earners make poor economic stimulus because they are more likely to save the extra funding rather than spending.

“The higher the household’s income, the more they tend to save. This means a large proportion of any tax cut that go to high-income earners will be saved, and its stimulatory effect will be much smaller,” he said.

The Australian Institute also noted that the government, when it legislated the stage 3 tax cuts in 2018 and then again when they increased them in 2019, said that they were affordable because of the expected strong economic growth out to 2024.

“The government was arguing that when times were good, we should cut taxes.

"Since 2019, the economy has collapsed into recession following the coronavirus pandemic. The government is now effectively arguing that when times are bad, we need the same tax cuts,” Mr Grudnoff concluded.

Why the narrative around stage 3 tax cuts is wrong
Why the narrative around stage 3 tax cuts is wrong
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About the author

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Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

author image
Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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