By cutting out the 37 per cent tax bracket, the latest budget also removes the “jewel” that is Australia’s progressive tax system, The Australia Institute has argued.
The 2018-19 budget, announced by Treasurer Scott Morrison last Tuesday, includes the removal of the 37 per cent tax bracket.
The removal of this bracket, which applied to those earning between $120,000 and $200,000, means those earning between $41,000 and $200,000 now effectively pay the same 32.5 per cent tax rate.
That’s factoring in the higher threshold for the 32.5 per cent tax bracket, increasing from $37,000 to $41,000.
Mr Morrison argued this would simplify the tax system.
However, to The Australia Institute’s (TAI) senior economist Matt Grudnoff, the removal of the bracket is an example of how “inequitable this tax plan is”.
According to TAI modelling, 62 per cent of the benefits of the tax cuts flow through to those in the highest income brackets.
At the same time, just 7 per cent are received by the 30 per cent of Australians in the lowest-earning bracket.
In a briefing note, Mr Grudnoff said removing the 37 per cent bracket, while bumping up the 32.5 per cent threshold, will see someone earning $40,000 accrue a tax cut of $455. Someone earning $200,000 would receive a tax cut of $7,225 a year.
“The jewel in the tax system is the progressive nature of our income tax,” the economist said.
“It means those who can afford to pay more do so. Moving from a progressive system to a flat tax system means a big tax cut for those at the top and very little for those at the bottom.”
Arguing that inequality is the most significant economic issue of the time, Mr Grudnoff characterised the budget as a “radical plan to increase inequality”.
‘The best way to deliver fairness is through a stronger economy’: Scott Morrison
Mr Morrison disagrees with Mr Grudnoff’s interpretation.
Speaking to the ABC, the Treasurer defended the changes, arguing the best way to “deliver fairness” was through a stronger economy.
Questioning whether someone earning $200,000 a year was rich, he said it’s “great” that those on lower incomes will likely never face a higher tax rate, thanks to the removal of the 37 per cent bracket.
“Our tax plan is a plan. It goes over seven years. It addresses the situation for all Australians, and it provides more incentive and more reward. It’s not based on envy and bitterness,” he claimed.
According to an ongoing Nest Egg poll, 53.9 per cent of readers believe an Australian is wealthy if they have an annual taxable income of at least $200,000.
That’s followed by the 22.7 per cent who think you can be wealthy with an income of between $150,000 and $200,000.
Just over 14 per cent consider a wealthy Australian to be one with an annual taxable income of between $80,000 and $150,000, while 9.3 per cent believe a wealthy Australian can earn between $60,000 and $80,000.
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