Coalition’s tax cuts overwhelmingly benefit the wealthy

By Leith van Onselen

Last month, The Australia Institute (TAI) released research estimating that “62% of tax cuts benefits go to highest income earners”, whereas “just 7% of the benefit goes to the 30% of Australians on the lowest wages”:

Now, the Grattan Institute has provided a submission to the Senate Economics Legislation Committee Inquiry into the Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018, which finds that “the Turnbull Government’s proposed personal income tax cuts are the largest ever proposed in a federal budget”, that “the substantial reduction in revenue is not obviously consistent with the Government’s medium-term fiscal strategy of budget surpluses on average over the economic cycle”, and “about 3 per cent of the tax burden will be shifted from the top 20 per cent of income earners to those lower down”:

Grattan Institute has estimated the impact of the tax cuts using the 2015-16 2% individuals sample file, assuming the Budget’s estimates of wage growth, and using the Budget’s estimates of labour force growth.

On these assumptions, as shown in Figure 1.1,4 the first tranche of the tax cuts, which introduces a Low and Middle Income Tax Offset (which we have labelled the “Lamington” for convenience), will reduce tax collections by $4.6 billion in 2021-22. The second tranche, will reduce tax collections by a further $5.7 billion in 2022-23. The third tranche, will reduce tax collections by a further $7.7 billion in 2024-25. This third tranche, will ultimately comprise almost half the annual cost of the Personal Income Tax Plan…

The fiscal problems of committing to large tax cuts in the future were illustrated in the late 2000s. The Government announced and legislated tax cuts in 2007 of $5 billion a year, with an additional $3 billion a year to take effect in 2008-09.8 By the time these took effect, the Global Financial Crisis had pushed the Federal Budget into a substantial deficit. But politically it was too hard to unwind tax cuts that had already been legislated.

The 2018 tax cuts are even further into the future: half of the proposed reduction – $11 billion a year – only comes into force in six years time. Based on history, a material economic downturn at some time in the interim is a significant possibility…

The various components of the package collectively reduce average tax rates by around 1 percentage points for most middle income taxpayers. But they reduce tax for the top 20 per cent of taxpayers by substantially more – around 2 to 3 per cent of income. The exception are the top 1 per cent, who get less – their tax cut is only worth only about 1 per cent of their income, as shown in Figure 3.2.

The overall progressivity of a tax system can be measured using the Reynolds-Smolensky index. This calculates how much a tax system redistributes incomes. As shown in Figure 3.3 on the following page, on this measure the Australian income tax system became more progressive between 2012 and 2016. Without change, bracket creep will make the system less progressive. The first stages of the Tax Plan will make it more progressive; the final tranche will make it less progressive.

Full report here.

Comments

  1. St JacquesMEMBER

    Nobody could have forseen such cynicism from our “leaders”….oh wait…

  2. bbagodiclives

    how dare anyone keep the money they earn ! What an outrage!
    Much fairer to steal it from them and give it to people like Jacob so he can sit on his arse all day and do nothing.

    • LOL, tax capital not wages I say! And Jacob can have his UBI 😀 Maybe if he’s lucky a high pressure shower head too!

    • reusachtigeMEMBER

      I agree, the wealthy should always get the biggest tax cuts because they give way more to society than the leeches down the food chain do!

      • Super Phoenix

        And if you add the well-documented trickle down, I mean trickle sideways, economics, it is no brainer!!!

  3. Some of us work damn hard for an income that actually isn’t all that high and pay huge amounts of taxes. Keep in mind that a single on $200K has similar net income to a married couple earning $86K each. If neither has kids the expenses aren’t all that different. Housing is just as expensive, as are utilities and insurance bills, council rates, etc. True some things cost more for a couple (total food bill) but even things like holidays benefit from the sharing of a hotel room.

    It would be incorrect to describe a single person earning $200K as wealthy. And if someone earns $200K and is supporting a family on that sole income, they wouldn’t quite be struggling, but very very far from even well off.

    • 200k after tax for a single income family basically just pays the bills with a little bit of pocket change for a family holiday. It really isn’t that much. Losing half in tax pushes people to trusts or offshore entities… or simply out of the country.

      • drsmithyMEMBER

        So how do the vast majority of households not earning 200k survive ?

        Losing half in tax suggests an income of $400k+.

    • “It would be incorrect to describe a single person earning $200K as wealthy”
      What percentile in income would make someone wealthy? The top 0.00001% , 1%, 10%, 30% ?
      wealth and poverty is always a relative rather than absolute measure, and median earnings around 90,000 puts 200k easily to 30% most certainly top 10% and maybe even top 1%.
      So please explain again how 200k does not make you wealthy, other than because you think you deserve more.

      • bjw678: I am not sure about the relevance of percentile of income. If in a given economy the income distribution is naturally narrow, then an income 2-3 times the average might be in the top few percentiles, but where income distribution is more skewed then for the same income this will not be the case. So according to your logic, in the former case a ‘high’ income is more deserving of punitive taxes than the same income would be in the latter scenario — such an outcome has no logical justification.

        More relevant is to examine the income figure compared to living costs as well as to what extent it is a multiple of average household incomes.

        Further, the issue isn’t one of ‘deserving more’. This is money I earn, the issue is one of to what extent the government has a right to take it.

        Remember, PAYG earners are easy pickings for the government, consideration should be given to limiting cash transactions to abate the huge amount of undeclared business income in the economy.

      • Davey, the issue of percentile income is that wealth is a relative measure, and if you are in the top percentile then you are by definition wealthy.
        Except of course everyone thinks wealthy is “someone who has more than me” no matter how much they have.
        But more realistically if you are earning 200k and are not wealthy the problem lies with you and not your income. The vast majority of families are lucky to be getting even 100k and simply have to make do with that, so if you are spending all your 200k and not accumulating wealth you have a spending problem, not an income problem.

      • bjw: your comment “Davey, the issue of percentile income is that wealth is a relative measure, and if you are in the top percentile then you are by definition wealthy.” — did you read my above analysis about percentile being an arbitrary measure heavily dependent on income distribution? You did not respond to it.

        “But more realistically if you are earning 200k and are not wealthy the problem lies with you and not your income. The vast majority of families are lucky to be getting even 100k and simply have to make do with that, so if you are spending all your 200k and not accumulating wealth you have a spending problem, not an income problem.”
        I see the green eyed monster is making you get personal.
        Who says I’m not accumulating wealth? I don’t live a lavish lifestyle at all. I go out to (very) modest priced meals 2 or 3 times a week (we’re talking $10-15 mains only here), drive a 10 year old car, live in a modest house (admittedly in a very well located part of Melbourne) with a small mortgage (plan on buying an IP in next year or so depending on how the market is going). I go on an overseas holiday once or twice a year. Not on business class, and I don’t stay in 5 star hotels – economy and 3 star for me.

        Most sensible people accumulate wealth and they are far from rich. See my earlier comment, $200K by a single = $86K x 2 by a couple. Would you consider $86K x 2 by a couple (without kids) ‘rich’ and so that they should have accumulated huge amounts of wealth?

    • As someone who’s bet income is close to that with stock options, fringe benefits etc.. but living in Sydney, expenses are high. When you factor in rent, tax takes about $60k p/year (no negative gearing here). But I have no kids yet. It’s the only reason I have a substantial amount of savings towards a house deposit. Anything I put in the bank is haircut 50% and when I sell my stock options I pay CGT on top of what I already pay in tax when I receive them. I’m not complaining, but there is a disincentive to work harder and harder when your taxed more and more. Personally I think income taxes are outdated. We should be taxing, land, capital harder. But then again by being an employee I’m not putting much skin in the game either. So I respect those who go out and start businesses and need all the help they can get to get them off the ground.

      Lord knows my part time business endeavors are almost always squashed due to punitive taxes and fee clippers.

      • drsmithyMEMBER

        How many times have you knocked back a raise because you would have paid more tax ?

      • Even StevenMEMBER

        @ drsmithy

        Poor example, sir. Would I knock back a pay-rise that requires me to undergo more stress and/or longer hours? Yes, I would. And in fact I have. It’s not a hypothetical for me. I am also actively considering reducing my hours. The marginal tax rate is a small but definite factor.

        The correct trade off you failed to identify is between Income and Time. You didn’t present a trade off in your example.

        Perhaps it is a good thing for the community if I reduce my work days to four instead of five. Sure, I’ll produce fewer widgets, but I’ll be a more cheerful citizen and will smile rather than curse at others. Who knows?

        I am in favour of progressive taxes. But I strongly refute suggestions it has no impact on choices people make.

      • drsmithyMEMBER

        Given one of the fundamental purposes of taxation is to influence behaviour, it would seem rather silly to suggest it does not.

    • Useless Eater

      It would be incorrect to describe a single person earning $200K as wealthy.

      For the benefit of the unwashed masses, could you please describe some of the privations and tradeoffs suffered to sustain the pauperesque lifestyle of this unfortunate single person, so that his low-income suffering may be appreciated in greater detail? What sort of modest income (after tax) would he need to sustain a ‘wealthy’ standard of living?

    • It would be incorrect to describe a single person earning $200K as wealthy.
      You are completely out of touch.

    • Some of us work damn hard for an income that actually isn’t all that high and pay huge amounts of taxes.
      What do you do for work that is so hard?
      Scrub floors? Move wheelbarrows full of bricks? Clean gutters on highrise? Out in the sun in summer?

      • I’m not ‘out of touch.’ I was earning about $120K 4 years ago, and I can see the difference the income. It’s material and nice to have, but has not catapulted me from ‘above average but nothing special’ to ‘wealthy’. Maybe one day if you apply the self-discipline and other traits to earn this you’ll appreciate my comments.

        As for my working hard, I often work on weekends, evenings, etc. There’s few free lunches in this world.

        It’s pretty obvious you and some of the others here are trying to make me feel ashamed of my income for some ugly reasons. It’s a pity that some aspects of the left try to knock down those that have been self-responsible for their financial position.

      • drsmithyMEMBER

        It’s pretty obvious you and some of the others here are trying to make me feel ashamed of my income for some ugly reasons. It’s a pity that some aspects of the left try to knock down those that have been self-responsible for their financial position.

        Nobody is trying to make you feel ashamed of your income.

        They are suggesting that perhaps you don’t realise an income of $200k puts you into the top 2% of earners, or that $120k puts you in the top 10% of earners.

        3/4 of workers make less than $85k.

      • DrSmithy, let me put things in perspective.
        Depending on the measure, Melbourne’s median house price is around $900K. Of course you could argue as a sole person I should live in a unit rather than a house. But I hate units. I hate the lack of privacy, the noise, dealing with a body corporate, being unable to make meaningful renovations (eg changing windows) without permission and consensus, etc etc etc. Not to mention the underperformance in capital gain of units compared to houses in the long-run.

        So how much could someone (in the general) on about $200K borrow for a mortgage? About $1.5m. Will $1.5m buy you a rich man’s house in Melbourne? It’s about 10 ballparks away from a rich man’s house price.Hell, $1.5m will barely buy you a decent house in say Carnegie, an OK but far from ‘blue chip’ suburb.

      • With all due respect, that’s your opinion. I’ve earned a variety of incomes in my life and without going into too much detail I came from a below-average socioeconomic background. So please don’t paint me as some delusional rich guy, as I’m neither delusional nor rich. Not that I wouldn’t want to be rich, just that Im not. At the risk of labouring the point, a couple earnings 86K each without kids is in a similar financial position to me income-wise, would you paint them as rich?

      • drsmithyMEMBER

        Other than intersecting lines on a graph, why do you think a single on a 2%er income is comparable to a couple on two 75th percentile incomes ?

        A 200k income is extremely high. An 86k income is just somewhat above normal.

    • I agree with you Davey. Where we should not engage in the conversation is where even MB seems to continually play into the truly wealthy’s hands by conflating income with wealth. In Australia especially wealth should be defined by the value of your assets.

  4. There are no wealthy people paying tax. I read it here all the time. So it doesn’t matter what the tax cuts are as no wealthy person will pay the tax rates anyway.
    Bring on the tax cuts!

    • Even StevenMEMBER

      That’s rubbish, Andrew. I know wealthy people who pay bucket loads of tax. Each of these wealthy people I’m thinking of pay the employment benefits, health costs etc of more than 20 people.

      Should they pay benefits/health costs for 50 people? Perhaps. But that’s a different question.

    • Hitler paid of a lot of tax during his lifetime. I understand there is a groundswell of support for the German government to return this outsized “contribution” to Hitler’s heirs.

      • Even StevenMEMBER

        Your implication being: the tax paid by the wealthy comes from what the wealthy confiscated from the poor?

        In some cases yes. In other cases no. I’m not sure I like your implication that all wealth is ill-begotten or undeserved. Pure capitalism is cruel. But so is pure socialism.

  5. $928/year huh?

    Just give a $928 cheque to every voter with an income less than $57k/year. And call the cheques “electricity bill rebates cheques”.

    Last week, Xi ordered his colleagues to study Marx’s 1848 Communist Manifesto

    There are signs that China’s is indeed improving its main form of poor relief, which is called “subsistence guarantee”, or dibao.

    • bbagodiclives

      Or perhaps just not have income tax at all given income tax largely just pays interest on government borrowings. They could just print a certain percentage of GDP instead. It would be less inflationary than borrowing at interest and given it was a defined percentage of GDP would not undermine faith in the currency whilst also constraining government spending.

      Just don’t start with your UBI bullshit – save it for your ‘feelings journal’

      • StephenMEMBER

        Even though taxation to the Federal Government (as monopoly currency issuer) doesn’t really pay for anything in the modern economy (since dropping the gold standard and floating of the currency), it is still required to control inflation, ensure there is a baseline demand for the currency and as a re-distributive measure (to control excess inequality).

        You could change the mix, say reducing income tax and bringing in land tax, but the Government wouldn’t have any fiscal space to spend into without causing inflation if you just removed it. You’d have to reduce Government spending, which means either the private sector has to take on more and more private debt to maintain growth, or the economy starts contracting (and deflation sets in, which is bad for almost everybody).

  6. Hard to give tax cuts to folks who pay bugger all tax. This is the dumbest blog post here for ages.

  7. If you want to see equality why not visit Cuba. Just remember to pack your own toilet roll, comrade.

    • Cuba has a lot of inequality. A bunch of greedy elites ruling many poorer people. Similar to here.

    • However if you want to see equality of opportunity, which is a much better goal, jump in your time machine and head to Australia 50 years ago.