Australian budget 2018
Grogonomics

The massive tax cuts outlined in the 2018 budget will have to be paid for somehow – and it won’t be by the rich

In 2014 Joe Hockey made the fatal mistake out outlining his dream of $80bn worth of cuts to education and health. Scott Morrison has not been so foolish but his desire to flatten the income tax rate is just as insidious. The government’s plan to cut income tax in a manner that is greatly targeted towards the wealthiest comes with a $140bn bill – one that cannot be paid with hopes and prayers about strong economic growth. Morrison’s desire for a flat tax is not about cutting taxes, it is also about inevitably cutting government services in the same way Hockey desired.
We probably should have seen it coming. While the treasurer might have talked of the priority of tax cuts for “low to middle income earners”, we should always know the deepest desire of conservative governments is to help the wealthy.
The budget tax plan outlined over the next four years is nothing too astounding. The move to not increase the Medicare levy by 0.5% point is one of those tax cuts that we won’t actually notice because no one has had to pay it yet.
The decision to increase the low income tax offset (Lito) and call it the “low and middle income tax offset” is a sensible way to cut taxes for low and medium income earners. Unlike adjusting tax thresholds, it places a cap on who gets the tax cut.
But even here we see where the government’s heart really lies.
Whereas the Lito currently cuts out at $66,700 – around the median full-time wage; Morrison has extended it to those earning $125,330 – at which point we are well beyond middle Australia and into the top 10%.
That Morrison thinks someone earning $120,000 is in need of a “middle income” offset betrays who he really thinks needs help.
While the tax offset is a rebate that you get at the end of the financial year, the government is also increasing the 37% tax threshold from $87,000 to $90,000. That means low income earners benefitting from the offset increase will have to wait till after July next year, those earning over $87,000 start getting their tax cuts from July this year.
Yes it is only $135 – or $2.60 a week, but it is rather striking that the initial benefit goes to those who need it least.
And yet it is all part of the bigger plan to take move Australia away from progressive taxation. Conservatives hate progressive taxation because it means wealthy people pay more tax than those on lower incomes.
The proposal in July 2024 to end the 37% tax bracket and instead have everyone earning from $41,000 to $200,000 paying 32.5% income tax is not about fairness, unless you think fairness involves reducing the amount of tax paid by the wealthiest.
Morrison’s big argument is we need to rid ourselves of bracket creep, as though it is some evil that is haunting workers, preventing them from getting ahead. But tax thresholds have only a minor impact on incentives to earn more, because you only pay the higher level of tax on the income you earned above that threshold:
In reality the biggest disincentive to earning more comes from non-income tax thresholds – such as the Hecs-Help threshold. If you earn below $55,874 you pay no Hecs, earn $55,874 and you are now paying 4% of all of your income – that actually does see your disposable income fall even though you are earning more.
Similarly the Medicare levy, the draw down on family tax benefit payments, the low income tax offset and other government benefits combined means there are much larger forces at play then worrying about what is your highest marginal tax rate.
And the reality is Australians don’t pay a high level of income tax.
The latest OECD report on taxing wages notes that Australia’s average tax wedge – which “measures the extent to which tax on labour income discourages employment” – is low across all incomes:
In 2017, the median earnings for a full-time worker was $65,572 a year. Even if we use Morrison’s heroic assumptions that wages from 2020-21 onward will grow by 3.5%, that would see such a worker only reach $87,000 by 2025-25 and the new threshold of $90,000 a year later.
The median income for all workers is currently just $52,988 – meaning they’ll only hit $87,000 in 2032-33.
I suspect such workers might have a few more pressing concerns than bracket creep:
So if it’s not really about reducing workers’ incentive to earn more money, then what is the move to a flat tax rate really about? It’s about giving wealthy people a whopping big tax cut.
Using the figures in the budget papers, the shift would see a fall in the average rate of tax paid by those on $70,000 of 0.7 percentage points, while those earning $180,000 would drop 2.6 percentage points, and those on $200,000 would see their average rate fall a massive 3.6 percentage points:
Proposals to flatten the income tax rate are always about giving bigger tax cuts to those on higher incomes. And this is not cheap.
In 2015-16 the roughly 400,000 people who had an incomes between $156,500 and $241,000 paid an average 32.6% tax on their income for a total of $24.7bn. Dropping that average tax rate to 29.5% would see a drop of $2.4bn in tax revenue – that’s around a quarter of the cost of Newstart each year. Add in cuts from the other 2 million or so people earning over $90,000 and you are talking big money – every year.
And it’s why the prime minister and treasurer have refused to say how much it will cost, and are sticking with the “$140bn over 10 years” line – but refusing to explain what is included in that figure, let alone breaking it down to individual items.
But then when you are trying to sell snake oil, you never want the customer to know the real cost.
And this brings us to the second reason conservatives like flat taxes – they mean less total revenue, and thus provide an excuse to cut government services and welfare.
And yet those services and benefits combined with our income tax system are fundamental to redistributing the national income and improving equality:
The flat tax will massively reduce the ability to fund those services – because it massively cuts the amount of tax that can be raised not only in good times, but when the economy is growing less than it is now. He wants to, in effect, lock in the need to cut services or face large deficits.
The treasurer and prime minister would have you believe their story that the budget is all good news – tax cuts and joy for “working families” – but their tale has a sting.
Right now the government wants parliament to vote for these tax cuts despite refusing to say how much they will cost, and how they plan on paying for them. Because you can bet the people who will pay will not be those who are getting the biggest benefit.
  • Greg Jericho is a Guardian Australia columnist