The Greens have called on Labor to oppose tax cuts to those earning in excess of $80,000, arguing that they are poorly targeted ‘trickle-down economics’. From The Guardian:
Greens Treasury spokesman, Peter Whish-Wilson, has written to Labor’s shadow treasurer, Chris Bowen, calling for reconsideration of the tax cuts in shadow cabinet and caucus. The call has been rebuffed, with Bowen insisting Labor will continue to support the cut.
The Turnbull government plans to increase the middle income tax bracket from $80,000 to $87,000 at a cost of $4bn over four years.
The tax cut is designed to prevent more than 500,000 people moving into the second-highest marginal tax bracket in the next year and does so through a tax cut to 2.5m taxpayers who earn more than $80,000 a year…
“This bill would deliver an additional $315 to only the top 20% of income earners,” he said.
“This includes some of the wealthiest people in the country, and goes well beyond the group of income earners most affected by bracket creep.”
I tend to agree with The Greens on this issue. The Turnbull Government’s thinking around tax cuts goes something like this:
- People will have more take home pay each week;
- So they’ll have more to spend on goods and services;
- Which boosts economic activity; and
- Creates more jobs.
In other words, classic “trickle-down” economics.
But there are problems with this logic.
First, the government will have to make-up the lost revenue in other ways, such as cutting expenditure on public services or raising taxes elsewhere. Hence, it will give with one hand and take with the other, thus mitigating the positive impacts on growth.
Worse, higher income people have a higher ‘marginal propensity to save’ (MPS). That is, they are more likely to save some of that tax cut than poorer people. Hence, it could actually lower growth compared to the government spending the money on services or infrastructure, or giving a tax cut to those on lower incomes, who have a lower MPS.
Second, just because you have lowered tax rates at the upper end doesn’t mean they will work more. These higher income earners are just as likely to choose to work less, play golf, and receive the same take-home pay. So the impacts on labour participation are uncertain.
Then there are the equity issues. Most taxpayers earn significantly less than $80,001, as explained by Peter Martin:
Most earners get nothing like the average wage. Right now the average full-time wage is $78,000, but the typical full-time wage is nearer $65,000. The average is pushed up by a comparative handful of high-earning megastars. In the real world three quarters of us earn less than that “average”.
Most are at no risk of crossing into the second-highest tax bracket.
In fact, according to analysis of Treasury data by The Australia Institute, if the Coalition goes ahead with the tax cut, it would benefit the wealthy up to 10 times more than average wage earners, and women would benefit the least:
For someone for whom a recent inflation-adjusted pay rise has taken them to $82,000, the benefit of a new $100,001 threshold for the 37 cent rate is extremely small – less than the price of a cup of coffee per week at $1.70 or $90 annually. For someone earning above $100,001, the benefit will be tenfold at $17 a week or $900 a year…
Those earning above $100K would get an annual tax cut of 10 times the benefit of someone who, for example, had just tipped over into the second highest bracket with an income of, say, $82,000.
And because women take up more lower-paid jobs in the labour force, including more part-time positions, the benefit to them, in many cases, will be nothing at all.
The progressive think tank’s modelling shows the cost to the budget would be in the order of $1.7 billion annually, of which women will get about a quarter of the benefit, or 27 per cent – compared to men with 73 per cent.
So if the goal of tax cuts is to boost aggregate demand, growth and jobs, then it would be better to fix-up incentives at the lower end of the tax scale to encourage would-be second income earners to move into the workforce, thus boosting labour participation. It would also be more equitable.
The problem with all of this is that providing tax cuts further down the income tax scale is expensive because there are so many taxpayers, whereas it is relatively cheap to give cuts to higher income earners, where there are much fewer taxpayers.
The Turnbull Government’s plan to cut the company tax is just as spurious as it would provide the lion’s share of benefits to international investors, whilst doing little for local business owners/investors. This is because the benefit of any company tax cut to domestic owners/investors would be offset by a reduction in imputation credits. By contrast, overseas investors who do not receive imputation credits would benefit fully from any company tax cut.
Hence, a company tax cut would primarily benefit foreigners, and by extension larger corporations at the expense of small businesses. This is because around 98% of small businesses (i.e. those employing four or less people) are wholly Australian owned and, presumably, indifferent to slashing the company tax rate. By contrast, 30% of large companies (i.e. those employing more than 200 people) are at least partly owned by foreigners, who would be the primary beneficiaries from the Coalition’s policy.
Whichever way you look at it, the Coalition’s tax cuts are ill-directed if the goal is to support jobs and growth, or to improve equity.
