Macquarie has some bad news about the tax cuts in the Australian budget

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  • Australia’s federal budget included a proposal to lower income taxes for low and middle income workers.
  • New analysis from Macquarie Bank suggests households will still end up paying more in come taxes, even with the proposed cuts.
  • Macquarie says this could allow for further tax relief to be announced ahead of the federal election.

Treasurer Scott Morrison delivered Australia’s federal budget this week, including a proposal to lower income taxes for low and middle income workers.

The tax cuts were well flagged even before Morrison stepped up to the Despatch box on Tuesday evening, undoubtedly contributing to a lift in consumer confidence in the lead up to the budget.

At a time of weak wage growth and, more recently, falling house prices in many parts of the country, it was welcome news.

However, before you rush out to spend your unexpected windfall, Macquarie Bank wants to let you in on a little secret.

Not only are the income tax cuts conditional on strong and uninterrupted economic growth over the next decade, extending Australia’s streak without experiencing a recession to over 35 years, but you’ll actually end up paying more in tax that what you are now, at least based off its calculations.

“The Budget contains enough information to estimate both the size of the Government’s proposed income tax relief and the decade-ahead path for the share of household income paid in tax,” say Justin Fabo and Ric Deverell, Economists at Macquarie.

“The planned tax relief only hands back part of the expected increase in income tax revenue from ‘fiscal drag’, what some call ‘bracket creep’.

“Our conservative assumptions suggest that households in aggregate will pay a rising share of their income in tax despite the proposed tax relief.”

As seen in the chart below from Macquarie, Fabo and Deverell estimate that household income tax payments will continue to rise as a share of income despite the planned tax cuts announced in the Budget.

Macquarie Bank

The percentage of your gross household income still increases, just not as much as what would otherwise have been the case.

Fabo and Deverell explain (our emphasis in bold):

Over the four years to 2021-22, income tax receipts are forecast to rise from 11.2% to 12.1% of GDP. Relative to gross household income, we estimate income tax receipts will rise from 15.5% to 16.4% over this period.

From 2022-23, while we know the size of the proposed tax relief, we need to estimate total income tax receipts. Under the counterfactual of no tax relief, income tax receipts are assumed to grow by 5.5% per annum. This is a deliberately conservative assumption given the historical relationship between growth in income tax receipts and gross household income. Combined with the known size of the tax relief, we then estimate a conservative profile for income tax receipts under the Government’s tax plan.

Relative to both household income and GDP, these estimates show that households’ income tax burden will continue to rise despite the proposed tax relief.

So rather than tax cuts, they’re really only offering tax relief.

However, by not handing back the full increase in expected income tax receipts to households on this occasion, Fabo and Deverell suggest there could be additional relief on the way for households in the not too distant future.

“This leaves room for the Government to promise more income tax relief in the lead up to the next Federal election so as to keep projected tax receipts below its self-imposed cap of 23.9% of GDP,” they say.

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