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The hurdles facing your promised tax cuts

Grattan Institute

New research released by the Grattan Institute has suggested that the Morrison government’s spate of tax cuts could cost $85 billion in the years following their roll-out.

Recap: what the changes are

Last year, the federal government announced plans to “reshape” the income tax system over the next seven years, as The Australia Institute described it.

The first stage of the plan largely involves tax refunds for low and middle-income earners, which Prime Minister Scott Morrison took to the federal election. Stage 2 and 3 would remove the existing 37 per cent tax bracket – and, as a consequence, flatten Australia’s tax system.

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The wins and the headwinds

With the likes of the Reserve Bank calling for fiscal stimulus, as well as soft growth across key economic metrics, research from the Grattan Institute indicated that the Morrison government’s planned tax cuts pose an economic risk to Australia. 

The government would have to substantially reduce growth in spending to deliver both the tax cuts and promised surpluses if the economy worsens beyond its current state, the Grattan Institute suggested. 

If the stage 3 cuts pass, the top 15 per cent of income earners would pay a lower share of their income, but the middle-income earners would pay a higher share to make up for the loss of income, according to the Grattan Institute. 

By contrast, the stage 1 tax cuts are predicted to boost consumer spending and economic activity at a time when inflation is low, the labour market is weakening and per person living standards have gone backwards in the three consecutive quarters. 

Stage 2 is predicted to help Australians giving back bracket creep and are likely to be affordable for the economy.

However, the Australian Institute has suggested that bracket creep is not a compelling case for an income tax reduction. 

The Grattan Institute called for passing stage 1 tax cuts immediately as it should be a priority. They have suggested there is no need for the government to commit to the stage 3 tax cuts now. 

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The hurdles facing your promised tax cuts
Grattan Institute
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