Finding the middle tax ground

May 8, 2018

Low and middle-income earners were the big winners from planned tax cuts outlined in the Federal Budget, with a dual-income family potentially saving $1,000 a year.

The personal income tax cuts, which delivers immediate tax relief for those earning up to $90,000 a year is part of a three-point plan to overhaul the tax system.

The final part of Treasurer Scott Morrison’s seven-year plan would see the 37% tax bracket abolished altogether by 2025 and workers on $41,000 a year paying the same tax rate as someone earning $200,000.

Under part one of the plan, low-income earners with wages of up to $37,000 a year will have their tax offset by an extra $200 on top of established offsets.

Those earning between $37,001 and $47,999 will receive a tapered reduction up to a maximum of $530 a year and those earning between $48,000 and $90,000 will receive the maximum offset of $530.

The offsets will be introduced in 2018-19 financial year.

The next stage is to tackle “bracket creep” by raising the 32.5% tax bracket from $87,000 to $90,000 from 1 July 2018, which Morrison says will prevent 200,000 tax payers from creeping into the 37% tax bracket due to something as basic as salary increases aligned to Cost Price Index.

Further threshold changes have been flagged for 2022-23, with an ambitious proposal to abolish the 37% tax bracket altogether from July 2024. That would mean everyone earning between $41,000 and $200,000 will pay a flat tax rate of 32.5%.

Rod Campbell, Research Director at The Australia Institute, says the longer term proposals will be a boon for higher income earners. Campbell also believes that the proposed removal of the 32.5% bracket is trying to have it both ways – “talking up tax cuts” that may never eventuate.

“If the cuts are fully implemented, in 2024-2025 someone on $200,000 receives a tax cut 16 times greater value than someone on $41,000,” Campbell says. “Because the tax cuts are so far out, they don’t have to deal with that reality.”

“Some of our initial numbers, and they’re not definitive, mean we’re looking at a $140 billion reduction in Government revenue over ten years which has serious effects on provision of services.” 

The Grattan Institute’s Budget Policy and Institutional Reform Program Director, Danielle Wood says it’s no surprise the Federal Government is giving away a big chunk of the recent revenue windfall in tax cuts, but says “it’s highly unusual to be committing to tax cuts two or three elections away”.

“Especially with so much uncertainty around future economic parameters,” Wood says. “Let’s not forget we haven’t seen the surplus yet and the wages forecast is quite buoyant - at mining boom levels.”

“The Government is saying that there are savings of around $400 million over four years, which is basically a rounding error. And that implies superhuman spending restraint in the normal programs. They have been successful in showing spending restraint to date but I do wonder how much further they can keep doing that.”

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