‘Too expensive, too risky, too unfair’: Tax cuts under fire following Grattan report
Wednesday, 3rd July 2019 at 4:25 pm
The final stage of the Coalition’s $158 billion tax cut plan would make Australia’s tax system less progressive than it’s been since the 1950s, a new report says.
Grattan Institute analysis estimates that the stage three cuts – scheduled to come into effect in 2024-25 – would cost the budget $85 billion over the next six years.
While the top 15 per cent of income earners would pay a lower share of their income in tax than they do now, low and middle-income earners would pay a higher share.
Report co-author Danielle Wood said it was not known whether these cuts were affordable or the right size and shape for the economy so far into the future.
“The economy is softening, the budget position is weakening, and calls for the government to use fiscal policy to stimulate the economy are growing,” Wood said.
“Tax cuts now could provide that stimulus but there are big risks from locking in major tax cuts on the never-never.”
The tax cut package is split into three phases over 10 years, with the third stage from 2024 creating a flat tax rate of 30 per cent for those earning between $40,000 and $200,000.
The Morrison government has said the full tax package is affordable because its budget numbers point to a decade of surpluses, which would exceed 1 per cent of GDP by 2026-27 even with the tax cuts.
— Grattan Institute (@GrattanInst) July 2, 2019
But Wood said the government would have to substantially reduce growth in spending to deliver both the cuts and the promised surpluses, particularly if the economy deteriorates.
Researchers said the cuts would make the tax system less progressive than it has been at any time since the 1950s, and transform Australia from having a relatively progressive tax system by international standards to having one below average among OECD nations.
The report warned the tax paid by low-income earners, as a proportion of their incomes, would rise rapidly.
For example, someone with a taxable income of $42,000 would have paid 13.5 per cent of their income in tax in 2017-18.
The Grattan Institute estimates this would rise to 15.6 per cent in 2024-25 and 18.4 per cent by 2030 if the final stage cuts are enacted.
While the institute is opposed to stage three of the cuts, it believes the first two stages – which target low and middle-income workers – would give the economy a necessary boost at a time of low growth and stagnant wages.
The Australian Council of Social Service has also been critical of the stage three reforms, arguing it would guarantee funding cuts to essential services and hurt society’s most vulnerable.
ACOSS principal adviser, Dr Peter Davidson, said the final stage cuts were “too expensive, too risky, too unfair, and too late”.
“We have a housing affordability crisis, an ageing population, entrenched poverty among people who are unemployed, and eye-watering childcare costs. We need to ensure we have the public revenue we need to face these challenges as a community,” Davidson said.
“It’s about priorities. Do we want to give $11,000 a year in tax cuts to people earning $200,000 or do we want to fix the gaps in our services and ensure we can fund them into the future?”
Katherine Ellis, CEO of Youth Affairs Council Victoria (YACVic), said the Grattan report showed the cuts would make young people worse off in the long-run and create an intergenerational gap in services.
“These tax cuts will mean we deepen the gaps in services and entrench inequality particularly for marginalised young people,” Ellis said.
The government’s three-stage plan passed the House of Representatives on Tuesday night and is now awaiting Senate approval.
Labor voted for the package – despite its opposition to stage three of the cuts – and hopes to amend the bill in the Senate.