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Why fast-tracking tax cuts won’t stimulate the economy

  • September 07 2020
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Why fast-tracking tax cuts won’t stimulate the economy

By Cameron Micallef
September 07 2020

Treasurer Josh Frydenberg has flagged that previously legislated tax cuts could be moved forward in a bid to help stimulate the Australian economy.

Why fast-tracking tax cuts won’t stimulate the economy

Why fast-tracking tax cuts won’t stimulate the economy

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  • September 07 2020
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Treasurer Josh Frydenberg has flagged that previously legislated tax cuts could be moved forward in a bid to help stimulate the Australian economy.

Why fast-tracking tax cuts won’t stimulate the economy

However, according to think tank The Australia Institute, bringing forward tax cuts will not help the nation out of its first recession since the early 90s.

Instead, The Australia Institutes senior economist Matt Grudnoff believes the stage 2 and 3 government tax cuts will do more to increase the savings of high-income earners and help pay down debts of the wealthy.

This will mean the proposed cuts won’t help stimulate the economy due to a lack of additional consumer spending.

“Bringing forward the income tax cuts would have a very poor stimulatory effect,” said Mr Grudnoff.

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“It is a simple fact of economics that high-income earners are more likely to save or pay down debt with the tax cuts rather than spend the extra funds to help stimulate the domestic economy.”

Mr Grudnoff explained that if the tax cuts were targeted at lower-income earners, it would likely have a far greater impact on the national economy. 

“Low-income earners, on the other hand, are far more likely to spend some or all of the extra money on much-needed essentials in the domestic economy,” he explained.

Mr Grudnoff points out that if the government does choose to fast-track its income tax cuts, it will do little to improve the health of the economy and will instead increase inequality across the country.

“A more effective way to stimulate the economy would be to invest heavily in direct employment programs or focus on supporting those who are doing it tough by maintaining or increasing the current rate of the JobSeeker supplement,” Mr Grudnoff explained. 

There are two stages to the tax cuts that have been legislated but are yet to come into operation.

There are several changes due in 2022-23, including an increase in the threshold of the 32.5¢ bracket from $37,000 to $45,000 and the threshold of the 37¢ bracket from $90,000 to $120,000.

In 2024-25, the tax cuts reduce the 32.5¢ rate to 30¢.

If the tax cuts scheduled for 2022-23 are brought forward to 2021-22, 91 per cent of the benefit goes to the top 20 per cent of earners, while only 4 per cent goes to the bottom half of taxpayers.

Bringing forward personal income tax cuts would see more than 50 per cent of benefits go to the highest 10 per cent of income earners and 79-91 per cent of benefits to the top 20 per cent of earners. 

Just 3-4 per cent of the benefit would go to the lower half of all income earners.

The Australia Institute said the billions of dollars that it will cost to bring forward the tax cuts could be spent more effectively by the government.

“Direct employment, labour intensive projects and grants to low-income earners would stimulate the economy much more than tax cuts to high-income taxpayers. For example, a permanent increase in the rate of JobSeeker would see all the extra funds go to those on very low incomes, which would be a much more cost-effective stimulus,” Mr Grudnoff concluded.

Why fast-tracking tax cuts won’t stimulate the economy
Why fast-tracking tax cuts won’t stimulate the economy
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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

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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