Prime Minister Anthony Albanese is hinting at potential expansions to the controversial stage 3 tax cuts so that they include lower-income earners.
The tax cuts were embedded by the former Morrison government and backed in by Labor ahead of the 2022 election. They’re therefore a bit of a sacred cow for taxpayers, though they've also become a millstone for Albanese and his Treasurer as they look for ways to deliver an equitable and responsible budget in May.
Blunt instrument
These cuts as they stand are seen by critics as a blunt instrument in a fiscal policy that needs to be carefully calibrated to avoid tipping the country into recession, particularly in the current moment.
The PM’s deliberation comes amid escalating debates over the cost of living and economic equity.
The proposed tax cuts, initially benefiting those earning from $45,000 all the way up to $200,000, are set to be introduced in July if they remain unaltered by the May budget.
As they stand, they propose a 30% tax rate on incomes in that broad range and are popular with the electorate despite the pressure they’ll place on inflation and criticisms that they benefit those at the upper end of the pay scale at the expense of the country's bottom line.
Albanese emphasised the government's focus on assisting low and middle-income earners, acknowledging their current financial strain, but held back from commenting on potential reductions in tax cuts for the highest earners.
Fairer structure proposed
There are suggestions that the government could go with a fairer alteration in the tax structure, maintaining a 45% tax rate between $180,000 and $200,000, an adjustment that would reduce the tax cut from $9,075 to $6,075 for those earning over $200,000, while potentially raising the tax-free threshold for all taxpayers.
Independent economist Chris Richardson proposed increasing the threshold from $18,200 to $19,500, which could result in a universal tax cut of $247 annually.
A government spokesperson maintained the current position but did not dismiss the possibility of changes.
The government is, predictably, being pulled in different directions. Shadow Treasurer Angus Taylor labelled any deviation from the legislated tax cuts a severe breach of trust.
Former federal treasurer Peter Costello argues that the tax cuts, part of a broader reform package, are essential for rectifying past bracket creep.
At the other end of the spectrum, the Greens, through deputy leader Mehreen Faruqi and Senator Nick McKim, continue to oppose the tax cuts, advocating for social welfare enhancements instead.
Economist Angela Jackson, from Impact Economics, views the alternative proposal as fairer and beneficial for labour force participation, especially among lower-income groups, while Steve Hamilton, from George Washington University, suggests retaining a 37% tax rate between $120,000 and $180,000, criticising the current structure of the cuts.
ANU’s Ben Phillips believes the changes to the cuts would marginally address equity issues but have minimal impact on the cost of living.
Welfare recipients, generally exempt from taxation, are unlikely to benefit from any changes in the tax-free threshold.
Other participants in the economy, regardless of political persuasion, will be watching the government to see how it structures the tax cuts come budget time.