Imagine that one day your boss tells everyone that the firm has a terrific three-part plan for pay rises. Part one will give everyone a $10 a week pay rise, starting in a matter of weeks.
‘What about parts two and three?’, you ask.
You’ve heard a rumour that they give a lot more to the senior executives, and might lead to layoffs. He shouts angrily: “If you don’t support the whole plan, you can pack your things and get out!”.
That, in a nutshell, is how Treasurer Scott Morrison is presenting the personal income tax cuts in its 2018 budget.
One part of the tax cuts, due to take effect in just under six weeks, is targeted towards low and middle-income earners. Another tranche, due to take effect in just over six years, gives the most to those who have the most.
Let’s start with the tax cuts due to start in six weeks. From the moment the budget was handed down, Labor announced that we would back them, and provide speedy passage through the parliament. We know that average households are struggling.
After accounting for inflation, the average worker hasn’t gotten a pay rise in the past 12 months. Petrol prices are on the rise. The home ownership rate is at a 60-year low. Indeed, the only people who don’t seem to think that it’s a good time to help out low and middle income earners are the Greens political party.
In fact, Labor doesn’t just support the government’s middle-income tax cut – we’ve pledged to nearly double it. Under a Shorten Labor Government, the average household would get a tax cut that is $400 larger than what the government has on offer. Because we’re not giving an $80 billion handout to multinationals, we can afford to put more in the pockets of 10 million Australian taxpayers.
But Labor will need more persuading before we support the six year tax cuts. Putting aside the fact that 2024 is two election cycles away, the later tax cuts are heavily skewed to the top end of town. In the absence of good distributional modelling from the government, a number of independent researchers have crunched their own figures.
The Australian National University estimates middle-income households get $913 (a 1% increase in disposable income), while households in the top fifth get $4,925 (a 2.2% increase). They conclude: “Initially these measures are tax cuts targeted at lower and middle income individuals but by the middle of the next decade the measures are weighted towards higher income individuals.”
Similarly, a Grattan Institute analysis concludes that the tax cuts due to start in July 2018 are reasonably equitable. However, ‘Once the Turnbull plan is fully implemented, most of the reduction in revenue is retained by the top 20% of income earners.’
By the late-2020s, the Institute finds that ‘the reduction in tax collected from this group will account for $15 billion of the $25 billion cost of the plan’.
Analysis by Grattan’s Danielle Wood looks at how the short-term and long-term changes would affect inequality, by calculating the ‘Reynolds-Smolensky Index’ of tax progressivity. She concludes that the 2018 changes would slightly reduce inequality, but the 2024 changes would markedly worsen inequality.
The inequity of the six-year tax cuts can be seen in looking across our suburbs.
The University of Canberra’s NATSEM centre finds that in 2024, a household in exclusive Sydney suburb Bellevue Hill will get a tax cut three times larger than a household in Lakemba. Similarly, a household in leafy Toorak will get a tax cut three times larger than a household in St Albans, in Melbourne’s west.
The Australia Institute calculates that for every dollar that goes to women in 2024, men would get $2.
To those who follow politics, this is a familiar pattern. In the early-2000s, US President George W Bush enacted a set of tax cuts that gave all taxpayers a $300 tax rebate. But the sting was in the tail. Once they’d been phased in, 53% of the benefits went to the top 1% of Americans. Those with incomes over $10 million got an average tax cut of $1 million every year.
Last year, President Trump did something similar. In the first year, the Trump tax cuts benefit taxpayer across the distribution. But by 2027, fully 83% of the benefits go to the top 1% of Americans, while middle-income households will be left worse off.
We even saw a similar story in Tony Abbott’s 2014 budget. In the short-term, the government claimed that a new debt levy on taxpayer earning over $180,000 made up for cuts to the social safety net.
Three years later, someone earning $1 million a year enjoyed a $16,400 tax cut when the debt levy was abolished. But students, the unemployed, the sick and the elderly were not so fortunate.
In Australia today, inequality is as high as it has been in three-quarters of a century. If you’re a surgeon or a financial dealer, your wages have likely been rising a lot faster than if you’re a cleaner or a shop assistant. A fairer tax system isn’t the only answer to narrowing the gap between rich and poor, but it’s certainly part of the solution.
As the party of egalitarianism, Labor believes in cracking down on tax havens, closing multinational tax loopholes, and ending unsustainable and inequitable tax concessions. At a time when banking malpractice is in the spotlight, we don’t support giving the big banks a $17 billion tax cut, while cutting school funding by $17 billion.
It’s time for Treasurer Morrison to drop his angry boss routine. Labor supports giving middle Australia a tax cut now. We back the middle class tax cut – and we’ll make it bigger and better. But the government needs to do much better at explaining the rest of its plan.
Let’s get the tax cuts that start in six weeks through the parliament right now, and put the six-year plan on the backburner.
* Andrew Leigh is the Shadow Assistant Treasurer, and his website is www.andrewleigh.com.
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