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.