The stage 3 tax cuts are back in the news, with inflation added to their list of ill effects.
Teal independent MP Monique Ryan has suggested we trim $8 billion from them and spend the money on building houses and boosting rent assistance for those on low incomes.
Treasurer Jim Chalmers has some tricky decisions ahead.Credit: Alex Ellinghausen
More than a year ago in these pages, I suggested a redesign of one part of stage 3, not because of inflation but as a matter of basic tax design. Today, it’s worth asking: are the ongoing critiques of stage 3 reasonable, and does persistent inflation change things?
Stage 3, as the name suggests, is the third of three stages of tax cuts, with the earlier stages focused on low and middle earners. Due to start on July 1 next year, stage 3 is a package of three changes: a reduction in the marginal tax rate from 32.5 per cent to 30 per cent on all income earned between $45,000 and $120,000; the elimination of the 37 per cent bracket between $120,000 and $180,000; and an increase in the income, from $180,000 to $200,000, at which the top 45 per cent tax rate kicks in.
The main criticism of stage 3 has been about fairness. And there’s no doubt it’s skewed towards higher income earners. But some context is needed.
Tax relief for low and middle earners came with the earlier stages, and stage 3 does deliver at least some tax relief to all those earning more than $45,000.
Keeping the 37 per cent rate and reallocating $8 billion to home construction and rent assistance, as independent MP for Kooyong Monique Ryan has proposed, would clearly raise, not lower, inflation.Credit: Alex Ellinghausen
Do higher earners get more tax relief when considering all three stages combined? Absolutely. Because they pay a lot more tax! Someone with a taxable income of $200,000 per year pays around $61,000 in income tax, while someone on $50,000 pays just $6700. Four times the income – but nearly 10 times the tax.
That means if you cut each of their taxes by 1 per cent, the higher earner gets a cut that’s 10 times as big. Ultimately, in terms of average tax rates, stage 3 doesn’t dramatically alter the progressivity of the tax schedule.
Stage 3 tax cuts are no big deal, with one exception
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07.12.2023
The stage 3 tax cuts are back in the news, with inflation added to their list of ill effects.
Teal independent MP Monique Ryan has suggested we trim $8 billion from them and spend the money on building houses and boosting rent assistance for those on low incomes.
Treasurer Jim Chalmers has some tricky decisions ahead.Credit: Alex Ellinghausen
More than a year ago in these pages, I suggested a redesign of one part of stage 3, not because of inflation but as a matter of basic tax design. Today, it’s worth........
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