The Australian Greens have hit out at the recent raising of the second highest tax threshold from $80,000 to $87,000, as well as cutbacks to some family tax benefits, claiming that it has left many poorer families worse-off and increased inequality. From The Canberra Times:
A Parliamentary Budget Office assessment of the combined impact of the two tax changes on a range of income groups found some families at the lower end lost money when the changes were factored in, compared with wealthier households, which came out fractionally ahead.
The independent PBO research was commissioned by the Greens, which had opposed both measures, against the support of the government and the opposition.
Greens leader Richard Di Natale, who is to address the Australian Council of Social Services annual conference this week, has used the data to launch a stinging attack on the major parties for adding to the problem of growing inequality…
“The Turnbull government says it’s all about creating ‘jobs and growth’, but in reality it’s determined to shrink the economy, to prevent the market’s capacity to create jobs and growth”…
“The Abbott-Turnbull budgets have ripped billions out of the pockets of those who can least afford it, which restricts their ability to consume and to access services at a time when the economy is already flat”…
“This Parliament has passed two pieces of legislation which have had the effect of making the income gap even wider than it was already…”
MB questioned the efficacy of the tax cut from the very beginning, arguing that it represented 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.
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.
