The economic battle has only just begun



The Treasury analysis used by Albanese and Treasurer Jim Chalmers to justify their broken promise goes to these three points.

According to Treasury, Labor’s proposal will encourage far more people to join the workforce. These will be low and middle-income earners who, because the 19 per cent tax rate will be sliced to 16 per cent, will not be belted by high effective marginal tax rates if they work a few more hours a week.

Treasury estimates about 930,000 hours extra a week will be created from Albanese’s 3.0 tax plan, more than double the original plan, with most of those going to people on incomes between $20,000 and $75,000.

They are likely to go to women in low-income occupations that desperately need to be filled, such as nursing and aged care. It also means more people in the workforce (and ultimately paying tax/receiving less in the way of support payments).

Women, who on average were to get a tax cut of $1278 a year under the original plan, stand to get $1649.

So in two ways – getting people into work and paying tax – the Albanese changes deliver substantially more economic bang than the original proposal.

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Treasury also reckons that over the next decade, the plan lifts government revenue by $28 billion (including $1.3 billion in the next financial year). That goes, again, to the benefits of more people being in work.

Morrison’s original plan certainly dealt with bracket creep, with the 30 per cent tax rate on incomes between $45,000 to $200,000. But it came at the cost of progressivity in the tax system (so much so that a person on $200,000 got a $175-a-week tax cut and a person under $45,000 got zip).

Labor has deliberately targeted the issue of bracket creep – but for low-income earners who are actually hurt more by it as their average tax rate climbs in line with their pay packet.

Now, instead of the benefits of the stage 3 tax cuts being wiped out by bracket creep for the average worker within four years, they are expected to be pushed out to six years.

The government could have splashed billions on a new low and middle-income tax offset. But that would have added to inflation, which would have forced the Reserve Bank to tighten monetary policy even further.

Instead, Treasury clearly set itself to keep the tax changes within the $21 billion annual cost envelope of the original stage 3 while also improving the overall tax system.

There are still glaring issues.

Retention of the 37 per cent rate re-inserts an incentive for people with sufficient financial resources, and creative accountants, to become innovative with their income tax arrangements.

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There are literally thousands of people, usually through a personal trust, who manage their income to just under changes in tax thresholds. In tax jargon, it’s called bunching – and Australians are among the world’s biggest bunchers.

Research led by Australian National University expert Bob Breunig several years ago found there were about 1896 per cent more people earning just under the $180,000 threshold – where the tax rate increases to 45 per cent – than there should be.

By retaining the 37 per cent rate, the incentive for people to bunch their declared income just under $135,000 is retained.

That’s a fight for another day.

The decade-long cost of the original stage 3 tax package had reached $388 billion. Albanese’s stage 3.0 comes in at $359 billion.

The economic discussion that will continue is what sort of financial payoff there is from such a large use of taxpayers’ cash.

Cut through the noise of federal politics with news, views and expert analysis from Jacqueline Maley. Subscribers can sign up to our weekly Inside Politics newsletter here.



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