Australia’s high earners will benefit most from the income tax reforms

Australia's treasurer Scott Morrison
This article by Gareth Hutchens and Katharine Murphy ( The Guardian 10 May 2018) backs the growing realisation that Tuesday’s federal budget is a con, pretending to give to the battlers. The authors use research carried out by the Australian Institute and the National Centre for Social and Economic Modelling (Natsem), to show that in the fine print, most of the handout is to the rich. A person on $200,000 earns five times more than someone on $40,000, but their tax cut will be 16 times higher, research claims. The income tax package is designed to continue the reverse the traditionally progressive aspect, where the higher the income, the lower the tax.

The Turnbull government’s plan to pursue billions of dollars in income tax cuts over the next seven years will radically alter Australia’s progressive income tax system, shifting more than 80 percent of workers to a flat tax, according to analysis.

The analysis shows the major beneficiaries of the government’s plan will be Australia’s highest income earners, with the top 10 percent of earners getting 40 percent of the value of its tax cuts, while the bottom 30 percent of earners will get just 7 percent.

The research, from the progressive think tank, the Australia Institute, comes as the Turnbull government is attempting to persuade crossbench senators to support its budget centrepiece, which was introduced to parliament on Wednesday, and before the Labor leader Bill Shorten’s budget-in-reply speech on Thursday night.

A separate analysis by the National Centre for Social and Economic Modelling (Natsem) of the budget’s tax and transfer changes also suggests high-income earners will benefit most from Tuesday’s night’s budget.

Natsem’s modelling shows that a two-parent family with both parents earning $100,000 and two school-aged children will be $1,022 better off in 2018-19 compared to 2017-18. This will increase to $4,280 by 2024-25.

As the Turnbull government has unleashed the traditional post-budget hard sell, it has faced pressure to reveal detailed costings of its tax plan.

The treasurer Scott Morrison stonewalled on Wednesday when asked to produce a year-by-year estimate of the cost beyond the forward estimates, with the costs escalating in the latter part of the package, which benefits high income earners.

With the high court handing down a decision triggering by elections in a super Saturday in July, the Coalition is concerned Labor will use the mini-campaign to ramp up a “class warfare” offensive, using the tax measures outlined in Tuesday’s budget, including the personal income tax cuts and the company tax cut for Australia’s biggest businesses.

The Turnbull government on Tuesday night proposed a mammoth seven-year income tax cut, worth hundreds of billions of dollars in foregone revenue, that will permanently alter the progressive income tax system by 2025.

It wants to reduce the number of Australia’s income tax brackets from five to four, and require the majority of taxpayers – everyone who earns between $41,000 and $200,000 a year – to pay a marginal tax rate of 32.5 cents.

It wants to roll the plan out slowly from 1 July, to be completed by 2024-25, and says it will simplify and flatten the tax system but not fundamentally change its progressiveness.

But the Australia Institute analysis suggests the opposite, saying the plan will increase inequality in Australia by forcing low-income earners to pay a bigger share of total income tax and those the top to pay a smaller share.

It says 80% of income earners will face a flat tax by the end of 2025, representing a radical change to Australia’s historically progressive tax system.

Using the latest taxation statistics, it constructed a model of Australia’s income tax regime, breaking down all taxpayers into 100 groups from the lowest income earners to the highest. It inflated income by nominal GDP and calculated how much each group would pay in tax as the income tax cut is introduced.

It split the taxpayers into three groups: high-income earners (the top 20% of taxpayers), low-income earners (the bottom 30%), and middle-income earners (the remaining 50%).

It found the top 20% of income earners will get 62% of the benefit of the government’s proposed income tax cuts, while the top 10% (very high-income earners) will get about 40%.

It found the bottom 30% will get 7% of the cut, while the bottom 10% (very low-income earners) will get just 1.5% of the tax cut.

“A simple way to look at this is to compare two taxpayers,” Australia Institute economist Matt Grudnoff said. “Someone earning $40,000 per year will get a tax cut of $455 per year while someone earning $200,000 will get a tax cut of $7,255 per year.

“Some might say that of course someone on $200,000 will get a bigger cut; after all, they pay more tax. But while someone on $200,000 earns five times more than someone on $40,000, their tax cut will be 16 times higher.

“While this tax cut has some parts that are designed to give relief for those in middle and low incomes, it is clear that the actual result of this tax cut is to hand billions of dollars to high income Australians and make Australia’s tax system more regressive,” he said.

The government has attempted to engineer instant political momentum behind the budget’s income tax package, introducing it straight away and demanding parliamentary consideration by July 1. It is unclear whether the Senate will support the entire package.

Labor will back the tax cuts for low and middle income earners outlined by the government on Tuesday night, but is reserving its position on the rest, and will have more to say on tax during Shorten’s budget-in-reply speech on Thursday night.

Some crossbenchers, including South Australian senator Tim Storer and the Victorian Derryn Hinch, have rejected Scott Morrison’s demand the tax package be considered quickly. Storer has also expressed concerns about flattening the income tax scales, saying the proposal is “regressive” and may be unaffordable.

Malcolm Turnbull on Wednesday insisted the tax package needed to be considered as a whole, not in increments, because “one stage flows into the other”.

Despite the ominous noises from the Senate, the prime minister expressed confidence the government would emerge with the package intact, saying: “I’m confident it will pass the Senate.”

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