Annual net income changes by selected taxable incomes with stage three tax cuts.
THERE has been a great deal of political energy and ‘will they, won’t they?’ commentary on whether the Albanese government will – or should – honour its commitment to stick with the proposed stage three tax cuts in the upcoming budget.
Under stage three of the tax plan introduced by the Morrison government, the $120,000 to $180,000 tax bracket will be removed, the 45 per cent tax threshold will increase to $200,000, and the marginal tax rate for those earning between $45,000 and $200,000 will reduce from 32.5 per cent to 30 per cent.
The proposal has certainly raised eyebrows, not least because it benefits most those at the higher end of the income distribution at a time when price inflation is biting hard.
But whether stage three goes ahead (and I think it will), there are strong grounds for a much broader conversation on the structure of our tax system, and the argument for structural reform.
Personal tax thresholds in Australia are fixed in nominal terms, and don’t automatically adjust to keep pace with inflation.
This means that taxpayers whose wages rise by no more than inflation could still see themselves pushed to higher tax brackets.
This phenomenon of bracket creep has long been relied on by successive governments as a source of revenue, even when they do nothing to rates and thresholds.
And just because the 30 per cent tax bracket will be longer under the stage three proposal, this doesn’t make bracket creep disappear.
In a sense, the stage three measures are a lumpy way of giving back to taxpayers what they’ve been paying to the government because of bracket creep.
A structural alternative would be to neutralise the personal taxation system against inflation by indexing thresholds to consumer prices.
Under indexation, you still pay more in tax as your income rises, but you won’t move to a higher tax bracket if your income rises at the same pace as inflation.
By not indexing tax thresholds to prices, the government is afforded the discretion either to announce cuts to personal taxation through changes in tax thresholds, or to do nothing and see tax revenues rise.
The argument against indexation is that it costs the government in lost revenue.
But without indexation, rising costs are invisibly borne by taxpayers.
By not indexing personal tax thresholds to prices, we have a tax system that in steady state guarantees the government an above-inflation pay rise every year.
At the same time, taxpayers are hit with higher average tax bills because of bracket creep, even though their incomes may have risen by no more than inflation.
Surely a fairer tax system is one that levels the playing field between the government and the taxpayer.
Indexation of the tax system lends itself to a greater transparency and accountability on the part of governments on all sides of the political spectrum.
A tax cut would be a tax cut, and tax increases wouldn’t be invisible.
If the Albanese government does hold to its election commitment and follow through with the stage three cuts, this should go hand in hand with a broader debate that puts indexation back on the table: and not just for personal taxation but for income support payments and JobSeeker, too.
• Professor Alan Duncan is director of the Bankwest Curtin Economics Centre
