If you earn less than $90,000, the Coalition’s tax cuts are a big lie
They don’t target bracket creep, they overwhelmingly benefit the rich and they open the budget to economic risks @GrogsGamut
Tue 1 Oct 2019
Areport by the parliamentary budget office (PBO) has revealed that the tax cuts legislated by the government overwhelmingly benefit higher income earners. It opens the budget to risks of an economic downturn given a narrowing of the tax base and projections within the budget that are very much based on an optimistic outlook for the economy over the next decade.
One of the best aspects of the minority parliament during Julia Gillard’s prime ministership was the creation of the parliamentary budget office. It provides an independent view of the budget because, unlike the Treasury, it does not report to a government minister; it reports to the Speaker of the House of Representatives and the president of the Senate.
Last week the PBO produced its annual “median budget projections” report, which provides some pretty forthright commentary on what the Treasury suggests the future will look like.
The PBO is unable to make its own projections – it has to use the economic parameters Treasury estimates – but it is allowed to assess those parameters.
The clear issue with the budget – as I noted at the time – is that its economic projections are very optimistic.
As the PBO notes, “the projections over the medium term are predicated on above-trend economic growth for much of the period and return-to-trend wages growth by the end of the forward estimates period”.
The forecasts for GDP growth are rather instructive:Advertisement
Over the next 11 years, the Treasury estimates that our economy will grow on average by 2.9% each year – a level that has been reached just twice in the past 10 years.
And let us acknowledge that the Treasury has not been wonderfully prescient on GDP growth of late.
Its first prediction for GDP growth in 2018-19, made in the 2015 budget, was for 3.5% growth. Over time this was revised down. But even in the 2018-19 budget the Treasury was still predicting 3% growth for 2018-19.
It ended up being 1.9%:
So predicting a five-year run of 3% growth from 2021-22 to 2025-26 is pretty ambitious.
But where the PBO really comes to the fore is its analysis of the tax cuts over the next decade.
Firstly, it notes that the government’s decision to cap tax revenue at 23.9% of GDP has placed greater risks on the budget.
Remember, the tax cap is a purely political measure with zero basis in economics. There is no economic theory that suggests if the government’s tax revenue rises above a certain percentage of GDP then economic growth falls – and 23.9% of GDP is extremely low compared with other advanced nations.Advertisement
It is a political measure designed to be able to suggest the ALP are doing something bad if their policies would see tax rise above that.
The biggest problem with the tax cap is that the government’s income tax cuts are designed to keep tax revenue below that level over the next decade. But at the same time it projects better growth than we have seen for more than 10 years.
Now, had the government allowed tax to rise above that “cap” it would, as the PBO notes, “partly shield” the budget projections from “the risk of adverse economic shocks.”
But when you set a cap and project to reach that cap only with the most optimistic predictions, it “removes this buffer”. As the PBO notes, “any weakness in tax receipts before 2029–30 would directly affect the budget balance”.
As it is the budget figures have income tax revenue rising to a post-GST high of 12% of GDP:
This might seem odd, given the tax cuts that have been legislated – surely income tax should fall? But here we discover the big lie of the tax cuts.Advertisement
They were sold as counters to bracket creep. The prime minister, for example, told parliament in November last year that the tax cuts would mean “Australians going to work today on a middle income over the next 10 years will not see bracket creep, the vast majority of them, for their entire working lives”.
The PBO report shows that the prime minister’s statement was completely wrong.
Bracket creep is not just going into a higher marginal tax bracket because of a wage rise, but also includes the increase in average tax rates within a tax bracket – because more of your income is taxed at your highest marginal tax rate.
And, as has long been known, bracket creep always affects those on lower incomes the most because their wage increases cause a higher percentage of the income to be taxed at a higher marginal rate than is the case with high income earners.
The government has removed the 37% tax bracket on incomes of $90,000-$180,000 to be replaced with a 30% bracket on $45,000 to $200,000 in July 2024.
But median income taxpayers were not likely to reach $90,000 until at least 2034-35, and those currently earning $90,000 were not in danger of reaching $180,000 until 2042-43:Advertisement
So the tax cuts were not really about removing bracket creep – even using the prime minister’s narrow definition of preventing people going into a higher tax bracket. They were about delivering tax cuts to wealthy people.
The PBO’s analysis found that “individuals in the second and third quintiles (together spanning the taxable income range $20,001 to $58,000), are expected to face the largest effects of bracket creep, while the benefits of the tax cuts are greater at higher quintiles”:
For those earning over $90,000, bracket creep is expected to cause individuals’ average tax rate to rise by 3.3% over the next 10 years, while for median income earners it will see a 6.3% rise.
And yet the impact of the tax cuts only outweighs the effect of bracket creep for those earning above $90,000 – i.e. in the top 20% of income earners:Advertisement
For everyone else, the average tax rate will rise.
For those in the second-lowest quintile, the average tax rate is set to nearly double from 5.3% to 9.9%.
It all adds up to a run of budget surpluses based on optimistic economic projections and poor-to-median income earners paying higher rates of tax, with increased risks should we have an economic downturn in the next 10 years.
• Greg Jericho is a Guardian Australia columnist