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Budget bubble

May 1st, 2016

The stream of leaks about Tuesday’s budget suggest that the process was still in turmoil until the last minute. If the last round of leaks are broadly accurate, it looks like a budget that will fit fairly neatly into a class war frame. On the tax side, the government has long been floating a cut in company tax rates and the removal of the budget emergency levy on incomes above $180k. At the last minute, they have apparently decided on an increase in the threshold (currently $80 000) for the 37 per cent marginal tax rate.

Presumably, Morrison and Turnbull think that this will be a vote-winner for people concerned about being pushed into higher tax brackets, or already in the higher brackets. How may such people are there, and who are they? Let’s suppose that the budget measures compensate for the bracket creep since Labor left office. The income tax statistics for 2012-13 showed that, at that time, 18.6 per cent of tax returns reported income of $80 000 per year.

Assuming a 10 per cent increase in nominal incomes since then, I estimate that around 5 per cent of taxpayers would have entered the 37 per cent bracket since then. Of course, most of these would be paying 37 per cent on only a tiny fraction of their income, but people don’t always judge these things sensibly. Still, a budget measure targeted at 5 per cent of taxpayers (a good deal less than 5 per cent of the electorate, even taking account of the fact that many are in couple families) doesn’t seem like an election winner.

The real punch of the measure is that everyone on incomes currently over $80 000 will benefit. Assuming a 10 per cent increase, the full benefit of $360 per year (the 4.5 cent difference in marginal rates, applied to $8000) would go to everyone with a taxable income above $88000. That’s about 25 per cent of the 12 million who file income tax returns or 3 million people.

Those above $180 000 will also benefit from the removal of the 2 per cent emergency levy, which is a much bigger deal for the beneficiaries. Anyone earning over $200k will gain at least $400 from this measure, more than from the tax cut

The threshold change I’ve calculated would cost around $1 billion a year to benefit a relatively small group of voters, most of whom are already Liberals and the rest of whom (including me, for example) are unlikely to be all that responsive to tax cuts.

As a political strategy, this doesn’t make obvious sense. I suspect, however, that most politicians and political commentators (particularly, though not only, on the conservative side) make their political estimates on the basis of people they know, many of whom are exercised about bracket creep, and very few of whom make less than $80 000 a year. I recall studies where members of the political class were asked to estimate the median Australian income, and got the number drastically wrong. The social bubble is reinforced by the intellectual bubble created by an increasingly fact-free rightwing world view.

Bubble thinking isn’t exclusively a problem of the political right. But it’s more prevalent there than at any time in the recent past. It may well prove the Turnbull government’s undoing.

* Peter Martin makes the same point about median incomes. After seeing a lower number in his article, I’ve corrected my original estimate of the budget cost, which was too high.

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  1. May 1st, 2016 at 22:17 | #1

    I hope.

  2. Ikonoclast
    May 2nd, 2016 at 08:07 | #2

    LNP policy is to do the greatest good for the least number. Having policy in turmoil until the last moment would indicate a lack of strategic planning around that objective. The dilemma is that the wealth objective (the greatest wealth for the least people) conflicts with the vote-garnering objective. Turnbull’s government is such an ideas-free-zone they can’t even develop a coherent strategy to achieve their own nefarious ends.

    In any case, is bracket creep such a worry now we have entered deflation? Can you imagine what chance most workers will have of getting a pay rise in a deflationary environment? It’s more likely pay cuts will be the order of the day. We will be plunged into recession and then depression if the LNP win.

  3. May 2nd, 2016 at 15:33 | #3

    From the ABS’s website (6345.0), wages growth from Dec. 2012 to Dec. 2015 was 7.3%. Inflation in that period (6401.0) was 6.1%. Surely, bracket creep should be very low on the list of the nation’s economic problems. Might I suggest: slow economic growth, which results in slow wages growth, might be more of a concern for Mr Morrison?

    Then there’s Morrison’s dishonesty around the use of the word ‘average’. It means something different to a statistician than it does in the phrase “average person in the street”. Average full-time earnings, $78,000 p.a. as of Nov. 2015 (6302.0), easily puts a person in the top 25% of taxpayers.

    But I’m sure that a tax cut for people earning over $80,000 p.a. will play well with the people who aspire to be earning that much.

  4. paul walter
    May 2nd, 2016 at 16:12 | #4

    I’d love to comment further, but I understand that John Quiggin, a gentleman, is averse to the employ of foul language at his site.

  5. conrad
    May 3rd, 2016 at 14:14 | #5

    I imagine if they linked all the tax brackets to, say, the inflation rate, then it would be a political winner even though it would give more money to richer people. They could also have a slow timetable for it’s introduction which means they wouldn’t need to think about how to pay for it immediately.

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