Senate passes high income earner tax cut

By Leith van Onselen

Yesterday, Labor sided with the Coalition to pass tax cuts to those earning in excess of $80,000, which will cost the Budget $4 billion over four years. The Greens opposed the tax cuts in full.

The tax cut will increase the middle income tax bracket from $80,000 to $87,000, thus granting an extra $300 a year on average to the top 20% of income earners.

MB has questioned the efficacy of the tax cut from the very beginning, arguing that it represents flawed “trickle-down” economics.

The logic around the tax cut 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.

But there are inherent flaws 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.

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.

Third, there are the equity issues. Three quarters of taxpayers earn less than $80,001. Moreover, according to analysis of Treasury data by The Australia Institute, the tax cut will 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.

Of course, 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.

Regardless, these tax cuts are ill-directed if the goal is to support jobs and growth, improve the Budget, or to improve equity.

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Unconventional Economist
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Comments

  1. casewithscience

    Usually, I would begrudge the rape of the public purse for the benefit of the wealthy and then I recently saw my total PAYG deductions for 15/16. Now my comment is:

    Nothing to see here. Please carry on your usual business.

    • For a moment I feel as good looking as Reusa, but then I remember I don’t have a property portfolio and would be lucky if anyone wanted to shag me.

  2. Why a dollar earned after a certain threshold should be taxed at a different rate? Why are we taxed based on personal income and receive benefits based on family income?
    This is not right.

    • Tassie TomMEMBER

      Two couples live next door to each other in identical houses. Both households earn $100,000 per year.

      Household A job-shares and each member earns $50,000. Household B is all earned by one person who works full-time.

      Household B pays $7000 more tax than household A.

      I’m in complete agreement with you Easy3. I’ve said it before here, but I’ll say it again – they should flatten the income tax scales as much as possible and use a broad-based wealth tax to make the tax system progressive, coupled with a government backed reverse mortgage scheme so that people whose significant wealth is tied up in their PPOR do not lose their homes.

      After all, I’d argue that someone on $150,000 who supports their whole family and is trying to pay off the remaining $800,000 of their $1 million home loan in Sydney (which wouldn’t get you that much of a house these days anyway) has less capacity to contribute to the government tax take than a couple (probably older) without children to support any more who have $3 million in assets (mostly in their PPOR and super) and no income – as long as they can tap their asset base.

  3. If you think growth = GDP then your model of economics is broken.

    A dollar of government spending on pink batts and school halls is the same value as a dollar that private businesses and households spend on their own priorities ?

    And the implication that tax policy is supposed to coerce people to work and slave away, with leisure seen as a bad thing ?
    Why not advocate the end of all public holidays if you believe this nonsense ?

    • And the implication that tax policy is supposed to coerce people to work and slave away, with leisure seen as a bad thing ?
      Very good point Jono. You seem to be using your brain. Keep doing that and keep away from Mises.org and I think you will have a very good understanding in a few years time.

    • Pink batt does more for the economy than share buybacks!!
      On a more serious note, cutting taxes doesn’t mean the government will spend less, so it is definitely a boost to growth.

      • I guess you subscribe to the broken window fallacy.
        War is good for the economy.
        Deaths and fires from pink batts are great for economic activity too.

        It seems you can’t grasp the economic concept of savings and capital. If you destroy and deplete the capital stock with wasteful interventions, it is worse than doing nothing. Do you really view all private economic spending as simply ‘share buybacks’ ?

        Such a terrible thing when free individuals get to keep their capital and decide where and if they spend it.

      • Deaths and fires from pink batts

        Pink batts don’t electrocute and they don’t burn. You’ll have to find something else to blame for those deaths and fires.

  4. “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.”

    $300 wouldn’t swing this very much, but it’s MORE likely people will work more, not less, as their net result would increase from the same level of work.
    Another way to think of it – let’s raise taxes on those earnings above $180k to 75% and see if they work more or less… or better yet, raise your own marginal tax rate by 15% and see if you’re motivated to earn more. The argument is ridiculous.

    “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.”

    After adjusting for choice of career, the pay ‘gap’ between men and women is basically non-existent. Making policy decisions based on the fact women make such choices, rather than what’s best for the entire nation makes no sense. Women are just as capable (with some minor physical limitations due to biology, which they usually overcome anyway) – why don’t we instead incentivise them into higher paying careers? (Tax cuts could be one way, but there are probably better ways)

    FWIW – The above doesn’t mean I support any form of tax cut, nor have I made a decision either way on what was passed, but some of the arguments against it really aren’t worth the time taken to type them up.

    • Another way to think of it – let’s raise taxes on those earnings above $180k to 75% and see if they work more or less… or better yet, raise your own marginal tax rate by 15% and see if you’re motivated to earn more. The argument is ridiculous.

      History shows that high marginal tax rates on top-end earners (90%+ in the US post-WW2) do not have negative impacts on a national scale, and that lower (and flatter) tax rates lead to increasing inequality and undermined public services.

      The most beneficial tax break to provide would be raising the tax-free-threshold.

      • “History shows that high marginal tax rates on top-end earners (90%+ in the US post-WW2) do not have negative impacts on a national scale, and that lower (and flatter) tax rates lead to increasing inequality and undermined public services.”

        Where does it show this – specifically the undermined public services? Singapore’s public services are great, but they have a flat tax structure.
        The ‘inequality’; I can understand how that works, but it’s necessary. Having a society that’s completely ‘equal’ is synonymous with communism… where doing nothing and doing everything would give you the same outcome anyway. Why would you bother working if equality was guaranteed?

      • Where does it show this – specifically the undermined public services?

        Public services have been undermined across the western world as taxes have reduced and tax structures have flatted. Driven in no small part by the idea that lower taxes must mean lower public expenditure (because there’s less “income” to spend – ie: lower taxes are theoretically “funded” by less public expenditure).

        Singapore’s public services are great, but they have a flat tax structure.

        Singapore is an authoritarian city-state with massive income gaps and inequality, riding on an underclass of poverty-ridden workers. Hardly a desirable template for Australia, despite the best efforts of a couple of decades worth of neoliberalism trying to take us down that path.

        The ‘inequality’; I can understand how that works, but it’s necessary. Having a society that’s completely ‘equal’ is synonymous with communism… where doing nothing and doing everything would give you the same outcome anyway. Why would you bother working if equality was guaranteed?

        Leave the poor straw man alone.

      • where doing nothing and doing everything would give you the same outcome

        I missed the place where someone argued for a 100% marginal tax rate. Would you be kind enough to point out where that is?

      • I’d expect no less given the leftist content.
        But it’d be boring if everyone agreed. It’s hard to get decent left-wing content, so it’s partly why I read this site.

      • LOL.

        MB is not “left wing”. There’s no agitating for compulsory unionism, mass nationalisation of industry, comprehensive cradle-to-grave welfare, centralised wage fixing, or numerous other “left wing” ideals.

        MB is pretty much straight down the middle. Slightly centre-right if anything as they will generally lean towards regulated private firms rather than new public institutions.

        MB is mostly run by people who would be at home in Menzies’ Liberal Party.

      • I’m not suggesting it’s aligned with Cuba or anything like that. But from what I’ve read, it seems slightly left of center. I could be wrong… seems I’m the only one willing to consider a change of opinion though, if it’s warranted.

        Nevertheless, I’m not here to change people’s opinions. Only to have mine challenged.

      • ‘MacroBusiness is Australia’s leading business and investment blog…At MacroBusiness we … provide a better discussion for your investments and business.’

        Yep – sounds like it’s written by Communists, for Communists to me.
        Investors of Australia unite, you have nothing to lose but your portfolios.

      • I could be wrong… seems I’m the only one willing to consider a change of opinion though, if it’s warranted.

        If you want to change opinions, it helps if you have reasoning and evidence, rather than assertions.

        MB (by which I mean the main bloggers) looks “leftist” to you because you appear to be way out on the no-tax, no-regulations, every-man-for-himself, government-small-enough-drown-in-a-bathtub, “right”.

        Like I said, MB is basically straight down the middle. It advocates public ownership where it makes sense (eg: natural monopolies, essential services), public services where they are known to produce better results (eg: education, healthcare), private industry with varying levels of regulation as required, etc.

    • Irrelevant discussion really, because the government doesn’t need to tax to spend

      If they simply had unfunded deficits, then inflation would be great and we could stop this zero and negative interest rate nonsense

  5. As someone who stands to benefit from the tax cut I certainly don’t feel like a wealthy taxpayer. As a gen Y earning sub 100k it feels like I’m part of the working poor unable to save enough after rent to put up a house deposit. Yay! Neofeudalism!

    • Strange Economics

      Say 80 k in Sydney (top halof of earners) minus 20 k tax, and 20k Rent, 10 k car and 20 k living – leaves 200 a week as nearly working poor.
      So Below 60k you are losing money every week with the enormous rent .
      Sydney is already full of working poor, those that don’t have the Bank of Mom and Dad or they are stuffed.
      Let alone mortgage buy a house.
      The housing Ponzi is killing everyone slowly,

  6. Great. more money for me to pay down my home loan. for me higher house prices means less money to spend on retail, i don’t know why the conventional thinking is that higher house prices = higher retail sales?!!!

    (and for the speculators – more money for them for their next deposit).

    • Probably based on when house prices were booming and people had generally bought them for three fifths of fuck all. House price goes up = equity mate = shopping spree.
      All the people who bought at high prices, however, have no money left to go shopping.

    • LOL! I think mine would pay for a coffee a week. Whatever…

      They can keep the money and spend it paying down the deficit or put it into education and other investments (eg. infrastructure).

  7. $300 per annum? Woot! I sure am gonna be going hog wild with the credit card once I get that extra $6 per week flooding into my bank account.

  8. I don’t see why we are harping on about “tax cuts for the wealthy” when the average wage is around the low $80k mark? The point of these tax cuts is to ensure there is not a massive tax based dis-incentive to take on extra work / over-time etc for the large number of people that earn around that amount. This group will only grow in number over the next few years as well. Yes the cut benefits those who already earn well above the average, but there numbers are relatively low, and they pay a shed-load of tax already anyway, so fair enough I say!

    • The point of these tax cuts is to ensure there is not a massive tax based dis-incentive to take on extra work / over-time etc for the large number of people that earn around that amount.

      Because if there’s one problem we have, with un- and under-employment in the teens, it’s work looking for people to do it !

    • Random PunterMEMBER

      Exactly right. It’s easy to bash so-called high-income earners, but when you look at your PAYG statement at the end of the year and realise that you were taxed an amount that is equivalent to a gross salary of $45k, I think it’s reasonable to say I pay more than my fair share. And these aren’t million dollar salaries I’m talking about here – just solid upper-middle class incomes for professionals like accountants and engineers.

      It’s like I’m supporting my own family, plus one entire additional person. Meanwhile Mr. $45k (lets assume he is white, urban and has a child) is eligible for no fewer than ELEVEN government welfare payments, of which the FTB payments alone leads him to pay no net tax whatsoever.

      So a $7k increase in the threshold? Pffff. Barely worth reporting on.

    • Tassie TomMEMBER

      I agree – why are we talking about “tax cuts to the wealthy” when they are not – they are “tax cuts to high income earners”.

      Income and wealth are different.

      Many high income earners also have high wealth, but many with high wealth do not have a high income. At least not a high taxable income.

    • Because to get the most out of the tax cut, you have to be earning vastly more than the marginal tax rate.

      E.g. If your earning is $80,001, your tax cut is not even 50c a year.

  9. Anything that reduces taxes is a good thing in my book, a tiny step in the right direction. LFF – lower flatter fairer is the idea.

  10. It’s going to “cost the budget $4B” ……….. so what? This is important if you are a dead set neoliberal believer in balanced budgets, but the economic reality is that an individual earning in excess of $80,000 has a lower propensity to spend at the margin than someone earning $50,000 who would most likely spend all and any marginal gain. So the effect is that $4B will be saved which won’t add to consumption in the economy but will add to private savings. As another blogger mentioned, this is a lost opportunity to put some demand into the cycle whereby the $4B cut to a $50K earner would be multiplied several times within the economy so the demand impact would be magnified by whatever multiplier applies to the economy. That’s how the demand pump is primed and not from trickle down theory.
    Anyway, what was the reason for the ALP supporting the cut? Probably to demonstrate they are not hindering legislative tax policy and only rejecting tax cuts to the major corporates. So the outcome is a tad unfair to lower income earners I guess, but not an earth shattering outcome, just the ALP staying in the game ………. pffft! ……….. politics is such shite.

  11. In Australia, its not about the ‘marginal propensity to spend’, its the ‘marginal propensity to borrow’. Those on 80K+ are expected to lever further into housing, thus expanding the money supply that little bit further and keeping the consumption boom / wealth illusion alive that little bit longer.

    Under ponzinomics, giving the <$80K peeps a tax cut is pointless since they can't afford to borrow anyway.

    • Yes! Exactly – it’s not giving something away for free, it’s giving something back that has been taken already by stealth!

  12. ceteris paribus

    Far better national investments available than this $1 Billion per year favour. But Shorten and Bowen intimidated by the predictable “beg and bother shit-storm” from the usual suspects. Albo and Plib are the policy future for a credible Labor.