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UNSW experts say advantages to the recalibrated tax cuts include addressing bracket creep and maintaining a progressive system.
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Stage 3 tax cuts to bring long-term benefits, experts say
11 July 2024
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Stage 3 tax cuts will have long-term benefits for the economy by addressing bracket creep and maintaining a progressive system, experts from UNSW say.
Labor’s package was recalibrated at the start of the year to reduce the tax break offered to wealthier taxpayers and increase relief for low- and middle-income earners.
Academics from UNSW said that while the immediate effect of the cuts would be dependent on whether taxpayers spent or saved the extra cash, they predicted “several long-term benefits” for the economy.
“The increased average take-home pay is $42 per week. If individuals decide to spend most of the increase in their income from the tax cut, then this will be inflationary and put upward pressure on the cash rate,” economics lecturer Nalini Prasad said.
On the other hand, if most individuals saved the extra cash by increasing their mortgage repayments, “then the effect on inflation will be muted”, she said.
When stage three tax cuts were proposed in 2018, the Morrison government planned to collapse 32.5 per cent and 37 per cent tax brackets into a single 30 per cent bracket and raise the threshold for the top 45 per cent tax bracket from $180,000 to $200,000.
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Announcing the changes to the Morrison-era policy in January, Prime Minister Anthony Albanese said his new plan would “benefit all taxpayers” while having a minimal effect on inflation.
The changes that took effect from 1 July include the lowest rate of income tax being cut from 19 per cent to 16 per cent and the second rate from 32.5 per cent to 30 per cent, applying to income up to $135,000. The highest 45 per cent tax rate has also increased to $190,000.
Associate professor Dale Boccabella said a “key advantage” of the tax cuts in their current form was that they helped with the problem of bracket creep, which occurs when inflation pushes people into higher tax brackets.
“The cuts help taxpayers by adjusting for inflation, so they aren’t unfairly pushed into higher tax brackets just because their nominal income has gone up,” he said.
However, he urged the government to go further to address the issue head-on by indexing tax brackets every year.
“A better approach would be to use an objective method like indexing to adjust tax brackets automatically,” he said.
Boccabella said the tax cuts also aligned better with a progressive tax system, where higher earners pay a greater percentage of their income in taxes compared to lower earners.
“Compared to the Coalition’s stage 3 proposal, which had a 30 per cent rate between $45,000 and $200,000, the current system maintains progressivity, with higher earners paying a higher percentage of their income in taxes,” he said.
“A progressive tax system can be viewed as more effective for wealth redistribution and achieving social equity.”
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