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.