The Stage 3 tax cuts, the third and final phase of the former Morrison government’s tax plan, have pinned Albanese’s government against the wall.
In two weeks’ time, the Albanese government will hand down its first budget. It will be the first time in history any Australian government has done a complete redo of the books for a financial year already covered by a previous budget. And, in this case, the redo comes with white hot debate over a slate of tax cuts that will overwhelmingly go to those who don’t need them.
Some economists say the cuts don’t make sense because money shouldn’t go to those who don’t need it. At least half of the 18 crossbenchers in federal parliament have urged the government to scrap them for the same reason. Union heads, meanwhile, have always opposed them.
Now, prime minister Anthony Albanese faces an unwinnable challenge: break an election promise to leave the cuts untouched and never hear the end of it, or move forward with new tax policy that will railroad millions of Australians—not least the nation’s youngest.
On paper, the Stage 3 cuts will do away with the 37 percent tax bracket altogether, bring down the 32.5 percent bracket to a flat 30 percent, and raise the threshold for the top tax bracket from $180,001 to $200,001.
In practice, the cuts will see those earning $200,000 a year—workers that are overwhelmingly older, previously sat at the top of the tax ladder, and represent just 3 percent of the overall population—will end up paying the same amount of tax as someone earning little more than the minimum wage.
Come tax time, the gains for some of the nation’s wealthiest are expected to grow by as much as $9,075, while those earning minimum wage won’t get anything at all. Eliza Littleton, a research economist at the Australia Institute, said from an age perspective, the cuts are “cooked”.
“The Stage 3 Tax cuts are economically reckless and unfair. This is particularly true for young people who will only receive 2.8 percent of the benefit in the first year of operation, despite making up 12.7 percent of taxpayers,” Littleton said.
“No matter how you dissect Scott Morrison’s Stage 3 tax cuts—whether by age, gender or income—they disproportionately go to those who need them the least, with around 50 percent going to people earning over $180,000 per year, mostly older men.”
According to analysis from the Australia Institute, men will get twice as much of the tax cut as women. Meanwhile, half will go to the top 10 percent of Australia’s earners; 72 percent of gains will go to the top 20 percent of earners; and, the bottom half of earners with just 5 percent of the policy’s tax incentives. The bottom 20 percent gets nothing.
“While young people will not benefit much at all from the $244 billion tax cuts for high income earners, we could be investing that money to help young people by investing in education, health, housing, wage increases and nation-building services to reduce the cost of living,” Littleton said.
“Basically, from an age perspective, the Stage 3 tax cuts are cooked.”
All told, the Stage 3 cuts will cost the federal government $17.7 billion in their first year—which is more than the total cost of the Pharmaceutical Benefits Scheme—and close to a quarter of a trillion dollars in their first decade.
When they arrived in parliament, the Stage 3 tax cuts had bipartisan support. During a time before COVID-19, before Russia’s assault on Ukraine, and before the International Monetary Fund and World Bank warned of a global recession, the cuts strolled through both houses broadly unopposed.
The goal, when they were being gussied up by the former Morrison in 2019, was to fix problems with a problem called “bracket creep” (where pay rises push people’s incomes up through the tax brackets by way of inflation, and leave them subject to marginal tax increases), and “reward” wealthy Australians for their hard work.
Back then, former treasurer Josh Frydenberg pitched the third stage of his government’s tax plan as a “progressive” shift to get Australia’s top earners paying more tax. In today’s terms, though, similar plays have fallen like a sack of rocks. Only weeks ago, newly-minted British prime minister, Liz Truss, was battered for doing away with the United Kingdom’s top tax bracket, which she was eventually forced to bring back.
In the meantime, though, the world economy was offered front row seats to a lesson in the failures of trickle-down economics. The value of the pound plummeted lows unseen since the 1980s (bad), and the cost of the government’s debt skyrocketed (also bad), which in turn triggered a mortgage crisis (bad). The UK’s financial markets spiralled.
After that, treasurer Jim Chalmers started to change his language on the government’s commitment to the cuts, turning attention to a gloomy global outlook and the changing nature of Australia’s post-covid economy.
Even the slightest indication of a change was enough for opposition leader Peter Dutton to dig his heels into a political war footing, taking to ABC’s Insiders on Sunday morning to promise the Labor government a term of political hell, should Albanese u-turn on the tax cuts.
It didn’t take Albanese long to heed the warnings.
Earlier this week, the wiggle room carved out by Chalmers was swiftly closed back up again by Albanese, who on Monday offered his firmest indication that the cuts are here to stay: “Well, no. There’s been no change in our position.”
Follow John on Twitter.
Read more from VICE Australia and subscribe to our weekly newsletter, This Week Online.