Stage 3 tax cuts: The fight is on

That’s the headline for my latest piece in Independent Australia . The next couple of weeks, leading up to Labor’s first budget, will determine the fate of this government, one way or another.

If the tax cuts go through unchanged, the government will be a failure as far as economic and social policy is concerned. Some have suggested that the problems could be fixed in a second term. But having handed out big tax cuts for 2024-25, it’s absurd to suggest that Labor could turn around immediately and campaign on cancelling them. And, there’s no guarantee of a second term. While the LNP is looking pretty hopeless at the moment, an economic downturn would change things. Locking in the cuts would leave Labor with little or no capacity to respond to such a downturn.

Modifying the tax cuts, to keep only the elements that benefit middle income earners would have the political costs associated with a broken promise, but would reduce the costs of the cuts by around $12 billion a year. This would give the government sufficient room to respond to economic crises and address urgent needs.

Among those wishing to keep the cuts for higher incomes, the two main arguments are

(a) a promise is a promise

(b) people earning $150000 or $200000 a year aren’t “rich”

On the first point, while it would have been better not to make the promise to implement the cuts, it’s rarely possible for a government to keep all its promises. Labor’s promise to deliver higher wages has already been downgraded to a hope that real wages *might* increase over the next three years.

As regards “rich”, it’s a meaningless term which roughly means “makes much more money than me”. The fact is that only about 3 per cent of income-earners have a taxable income of $200 000 a year. This well-off group have less need for tax relief than the rest of the population

We need to keep the pressure up, in every way possible, until Budget Day

19 thoughts on “Stage 3 tax cuts: The fight is on

  1. “(b) people earning $150000 or $200000 a year aren’t “rich””

    I agree that the term “rich” is probably inappropriate – the seriously rich aren’t wage-earners at all, and gain their wealth through trusts, property, dividends, capital gains, and so on.

    But anyone on more than $150K is doing pretty well, and well above median full-time income of around $90,000, with huge numbers of people earning far less than that, often through minimum-wage or casual work, plus piece-rates and commissions.

    The problem with the tax cuts are that – while they apply (very minimally) to people on $50K-$70K who are not “rich” – they apply to the extremely high income-earners as well.

    The other objection is that it’s essentially a flat-tax system for about 95% of the income-earning population, whereas there are very good economic and social-policy arguments for a genuinely progressive tax scale.

    We already have a significant (and ruthlessly) regressive tax system in the GST – we need a progressive tax scale, with at least two step between $50K and $200K, and scales like 30%, 35%, 40%, and 45%. I do agree that there is a need for bracket-creep safeguards.

    As a social-democratic party, I can’t see how or why they agreed to these cuts, and further, they are now in power and aren’t bound by the legislation. They will be slaughtered by the conservative media if they renege, but if they come back with a different plan, then they should survive it.

  2. From todays AFR:

    ….people earning over $180,000 paid 31.6% of total net income tax in 2019-20, despite representing just 3.6% of the taxpaying population.

    Since the $180,000 starting salary for the 45% marginal tax bracket hasn’t increased since 2008-09, wage inflation has tipped an extra 300,000 taxpayers into the highest-earning tax threshold.

  3. “….people earning over $180,000 paid 31.6% of total net income tax in 2019-20, despite representing just 3.6% of the taxpaying population.”

    It’s pretty-much a meaningless stat – unless we know what percentage of total gross income that same 3.6% takes in … I expect it’s rather more than 31.6% of it!

    And I agree we need bracket-creep safeguards … but these arguments from the AFR are total deflection and distraction. The issue is whether those earning $50K should pay the same top rate as those earning $200K, and further, should those earning say $5m benefit from the same “tax breaks”.

  4. Therefore the proposed tax cuts would be of benefit to only 3.6% of the tax paying population while costing the nation $31B per year and $243B over the next 10 years.

  5. “.people earning over $180,000 paid 31.6% of total net income tax in 2019-20, despite representing just 3.6% of the taxpaying population.”

    This is merely another way of saying the income distribution is very unequal.

  6. Good of you rog, and Cargill, to run the missing numbers for Harry. He already knows yet leaves out part of the story.

    Harry – why not spell out in full what you mean to say? Not just provide (you still read the AFR every morning) number of target market fir the AFR “an extra 300,000 taxpayers into the highest-earning tax threshold.”

    As to the numbers, as always a dollar “value” and opportunity cost is what “we” focus on. Not the wedge and short term means to an end politics, which really, is more important.

    Does anyone know who, where, when and to whom “the promise” was made?

    As I said here previously, if I were Albanese, on day one I would have done a Hawke/ Whitlam-esque backflip and shoved JQ’s “keep only the elements that benefit middle income earners” and wider societal benefits down the AFR / abNews corps throat at every turn.

    And really, the promise is a symptom of our duopoly and nedia landscape. Not intelligence or good policy.

  7. There are more important issues which would render tax debates moot.

    Shane Bazzi vs Dutton:
    “Wealth or popularity shouldn’t determine our access to legal representation.”

    “It was eventually referred to the security and counter-terrorism command for investigation.”

    “It is an extraordinary experience to be sued for defamation by someone who has built his political career off being a political head kicker, a hard man of the right, presiding over a brutal detention system, vilifying Lebanese Muslim immigrants, fear-mongering about “African gang violence” in Melbourne, attacking the media and advocates, making jokes about rising sea levels in the Pacific Islands nations and boycotting the apology to the Stolen Generations in 2008.”

    “Despite all this, Dutton claimed my single deleted tweet had hurt his feelings.”

    “The increasing trend of politicians suing for defamation, particularly those considered to be free-speech warriors, raises genuine concerns about freedom of speech. While there must be some limits to that freedom, particularly around hate speech, which must never be tolerated, politicians should expect to be subject to adverse opinions.”

    “A politician using defamation law to stifle expression of public opinion is cause for real concern.”

  8. “There are more important issues which would render tax debates moot.”

    I assume this is sarcastic.

  9. Politically I think the ALP will be damaged if they DONT dump these tax cuts, the 3.6% might have their noses out of joint but the vast majority will be pleased that the rich are paying their share.

  10. “Politically I think the ALP will be damaged if they DONT dump these tax cuts …”

    I agree, and I said so up-thread. The rightwing media will go feral for a while, but the vast majority will think it’s a ruling-class rort, and won’t buy the “tax hike” argument from the Tories.

  11. The current income tax schedule is too flat over a large income range, IMHO. Moreover, this schedule does not take into account the regressive aspects of the GST.

    There are often if not always more than one way to achieve a policy objective. Assuming the economic policy objective is to make the tax system more progressive and assuming the policy objective is not to break an election promise (stage 3) then both can be achieved by not cancelling the tax cuts as promised and, depending on the economic circumstances, introduce a budget repair levy of x(k), where x is a function of the income bracket k to be defined by the scheme (there may be more k-brackets then brackets in the current schedule). Furthermore, if the economic circumstance of wages not matching the increase of essential cost of living, a subset of the CPI, then an increase in the tax free thresh-
    hold may be considered.

    In the above, the notion of economic policy objective includes the objective of a sustainable income distribution and social cohesion.

  12. No one seems to have offered any suggestions as to WHY Labor is so myopic and anal over the issue.
    Why is it that politicians always duck the issue as to integrity, logic and humanity (Ohhh the Manitees!!)

  13. I expect Labor know that they are wedged, there being no doubt that LNP plus RW dominant and partisan media will relentlessly criticise any broken electoral promises as was the case with Gillard and carbon taxes, whilst the economic fallout of denying themselves the funding they need by granting the tax cuts will be criticised as failure of Labor economic management. That Abbot subsequently broke numerous electoral commitments, that were not relentlessly criticised just makes clear that Labor always works at a disadvantage with respect to media bias. It is win-win politically for the opposition at the expense of Australia’s economy.

    Well, Dutton made it clear the surest path to LNP return to power is the economy going badly under Labor, with no indication of any intention of LNP supporting anything Labor does that would improve the economic situation. Like with climate and environment there is no sense that the LNP recognises any overarching duty of care, just politics as gamesmanship.

  14. I expected I’d find this from a neoliberal or corporation:

    “How Broken Promises Can Benefit Your Company

    “And that’s where the power of the broken promise resides. Long-term, it eliminates the need to pull rabbits out of a hat by forcing everyone to confront the ugly truth of the system.

    “So try breaking a promise and letting someone down. See what you learn.”

    We may ask then, do not break the promise until society breaks enough, ending in “forcing everyone to confront the ugly truth of the system.”

    Hmmm… break the damn promise Albo asap.

  15. Do a reverse Cambridge Analytica.
    Spend $15 to act?
    – What is the ethics & economics of this re Stg 3 Tax Cut?
    – Worth it or just wait?

    “The Election-Swinging, Facebook-Fueled, Get-Out-the-Vote Machine

    “Former Democratic operative Tara McGowan is sinking millions into Meta’s ad network to build Courier Newsroom, a media powerhouse for the left.

    “About 3,300 more of the targeted residents had turned out to vote than had been forecast to. The ads, they concluded, had worked, and at a reasonable $15 per vote. That’s about what Biden had spent nationally in 2020 while defeating Trump, though he spent more per voter in swing states.”

  16. “Well, Dutton made it clear the surest path to LNP return to power is the economy going badly under Labor, with no indication of any intention of LNP supporting anything Labor does that would improve the economic situation.”

    Tories are inherently, irrevocably evil, and always have been. Labor has to toughen right up and push an economically sensible agenda while they have the numbers in both the Reps and Senate (sort of).

    I really trust they drop (or totally re-write) the Stage 3 tax cuts … they are an obscenity in every way you care to look at them.

  17. JQ today “Projections now bear no relation to reality”.

    And The Grumpy Economist who says re UK pension fund tests: “it’s fairly easy to make a strategy that is safe up to 1.0000 percent but blows up at 1.0001 percent.”

    “In sticking with tax cuts divorced from reality, Labor is left with a hard choice

    “Labor promised before the election it would implement the cuts, but over the past few weeks it has encouraged a debate about abandoning this position, given changed circumstances. Nevertheless, it now appears the tax cuts will go ahead as legislated.
    [Not if my cunning plan has desired effect]

    “The pound plummeted in value, as traders expected its real value to decline. Major pension funds, which employed complex strategies to manage their holdings of bonds, faced collapse. The Bank of England was forced to intervene by stepping in to inflate demand for government bonds.

    “Truss backed down on scrapping the top marginal tax rate of 45%, paid on income in excess of £150,000 (about A$250,000). This saved about £2 billion. In a second backdown late last week, Truss accepted a previously announced increase in corporate tax rates, which she had planned to cancel, would go ahead after all. But the equally regressive cut in national insurance contributions remains, along with a range of business handouts.

    “Projections now bear no relation to reality”…

    “More UK finance regulatory failure

    The Grumpy Economist
    John Cochrane’s blog
    Friday, October 14, 2022

    “In previous blog posts here and here, I criticized UK financial regulators for missing simple leverage and margin requirements in UK pension funds. To be clear, I don’t criticize the people. The point is, if after 10 years of intense regulation, a group of really smart and dedicated people can’t see plain old leverage, the whole project of regulating risks is broken. And it’s not just the UK. The Fed bailed out money market funds in 2020. Again. 

    “I insinuated the regulators were not paying attention. I was wrong. It turns out they were paying attention. Which makes the failure all the more stark.  

    “This is part of the problem of regulation. Regulators test a single number, 1.00000 percent rise. But 1.27%? The world ends. Also it’s fairly easy to make a strategy that is safe up to 1.0000 percent but blows up at 1.0001 percent.

  18. Reverse Stage 3 Tax Cuts amoral philosophical reasons for Albanese & Labor … “and ignore moral theory’s labyrinths of futile debate and the high-minded contempt encouraged by the moralistic stance” (de Sousa), soon to be prosecuted all over news corp.

    “Forget morality
    “Moral philosophy is bogus, a mere substitute for God that licenses ugly emotions. Here are five reasons to reject it”

    by Ronnie de Sousa

    “In Kantian morality … “Sure, I might sometimes say I promised myself … But a promise can always be waived by its beneficiary. As the promisee, I can waive my own promise. To say I failed to keep it is just to say I changed my mind.”

    “For a consistent utilitarian, you are guilty whenever you contribute much less to charity than what would entail your own destitution. Since most people find this to be more than they can accept, Singer has provided a calculator that will suggest how much you should set aside to save others from poverty. But that again sets an arbitrary limit to the principle of utility.”

    “For an Aristotelian or ‘virtue theorist’, the case can look somewhat better. A virtue theorist can admit a plurality of values. … “you might not be actualising your own potential for human excellence as efficiently as you should. Aristotle himself avoids having to say that every act and thought is subject to moral praise or censure mainly by conceding, in the opening chapter of his Nicomachean Ethics, that ‘exactness must not be looked for in all discussions alike’. The morality-free space I can carve for myself is mainly due to the impossibility of knowing exactly what my potential might be.

    “In the end, then, in each moral system, some space is typically protected from the tyranny of totalising morality only by making arbitrary concessions about realms of life that are deemed insufficiently important to need controlling. The price paid is inconsistency.

    “Perhaps, given our fallible nature, inconsistency in a moral system is a defect we must live with. But that would still leave the institution of morality open to my second charge: the double counting of some reasons.”

    “If your original reason is challenged, surely you would want to support it with something morecredible than it was in the first place. Instead, the moral philosopher tells you that your reason has become overriding, because it is derivable from another reason less credible than itself. It seems that your confidence in your original reason should be diminished rather than raised by that ‘justification’. Why bring in the dubious to buttress the obvious?

    “This is where the moral theorists really get going. They recognise that a justification is just another reason, which can in turn be challenged, and so on. To stop the ‘and so on’ from goingad infinitum, they appeal to ultimatevalues or principles that serve asfoundations from which both the original reason and the general rule can be deduced. If those foundations are absolutely certain, they will transmit that certainty to the particular reasons they entail.

    “Unfortunately, the quest for those foundations makes things only worse. This is my third complaint.

    “Better to just assess and compare your reasons, and ignore moral theory’s labyrinths of futile debate and the high-minded contempt encouraged by the moralistic stance.”

  19. The media heat shouldn’t be just on Labor to change these economically damaging tax cuts, it should be on the LNP to support removing them for the sake of Australia’s economic well-being.

    Well, we know Mr Dutton has made it clear that the surest path to a return to LNP government is the economy going badly under Labor but maintaining support for a policy that helps that – and making it clear they will relentlessly attack Labor if they don’t go ahead – may seem like a win-win opportunity but surely there are some parts of the media pack who are capable of holding Dutton and team to account for putting political gamesmanship ahead of the good of Australia.

    Ironically I suspect Dutton would gain some kudos for putting the economy ahead of political point-scoring – kudos from swinging voters the LNP needs. Not so much from the hard core Right – but those he can keep satisfied with the empty pretense he wants nuclear power for Australia.

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