Albanese slams door on Labor’s own tax aspirations

Albanese slams door on Labor’s own tax aspirations.

Australia’s personal income tax structure has been in a state of flux over many years, and the Albanese government’s backflip over the already legislated Stage 3 tax cuts is best assessed in that context.

Although the government would not put it in these terms, it wants to restore the marginal rate scale to where it was in 2010-11 — at the end of a long stream of tax cuts put in place by the Howard government, starting with the GST compensation cuts in 2000-01.

The last few reductions in 2008-09, 09-10 and 10-11 were implemented by the Rudd government, but were set in train by the Howard government, partly in legislation and partly still to be legislated after the 2007 election. Rudd (unlike Albanese today) honoured his election promise to implement what the Coalition had set in train.

One small difference is that in 2010-11, the lowest marginal rate was 15%, and now it is to be 16% in the reshaped Stage 3. Otherwise the marginal rates are the same: 30, 37 and 45%, although the standard Medicare levy has been increased by 0.5% since 2010-11 — thereby boosting all true marginal rates by that amount.

The Howard government had also announced a cut in the top rate from 45% to 42% from 2010-11, which Rudd ditched before the election. This was shortsighted, but not a broken promise.

The later increases in the 15% marginal rate to 19% and the 30% rate to 32.5% were the work of the Gillard government in 2012 when the tax-free threshold was simultaneously lifted to $18,200 as compensation for the carbon tax.

Stage 3 as revised by the Albanese government therefore reverses a couple of marginal rate increases under a previous Labor government. So should Albanese be praised for going back to what John Howard and Peter Costello — gold medal tax cutters — had put in place?

Not so fast.

For one thing, that assessment depends on whether the thresholds have been increased since 2010-11 to offset bracket creep. The CPI has risen by about 45% since then and average full-time earnings by a little over 50%. By comparison, the tax-free threshold has been trebled (pass), the $45,000 threshold represents an increase of 22% (fail), the new $135,000 threshold is 69% higher (pass), and the new $190,000 threshold is a token 6% above where it was in 2010-11 (fail).

While annual indexation of all thresholds would be the surest and most transparent way to correct for bracket creep, there are many different ways to achieve the same aggregate outcome — and the government says this is what it is doing — but the tax cuts in Stages 1, 2 and 3 do not offset 14 years of bracket creep for the vast majority of taxpayers.

The egregious failure is the very small increase in the top rate threshold. Whether it is to be $200,000 as in the legislated Stage 3 or $190,000 as the revised Stage 3 is really beside the point: which is that a much larger increase is justified.

As a multiple of average earnings, the top rate threshold is already quite low by past standards and very low by international standards. And it will become lower year by year, drawing increasing numbers into the top two brackets.

What about the marginal rates themselves? The Howard government, as noted above, had a firm proposal (included in the forward estimates but not legislated) to cut the top rate from 45% to 42% in 2010. A re-elected Coalition government would have been very likely to honour that.

The Howard government also aimed to cut the 37% rate to 35% and the 42% rate to 40% by 2012. That intention was subject to much more uncertainty, including another election in 2010, but Labor also had its “aspiration“ tax plan — the goal of a simpler marginal rate scale of 15, 30 and 40% by 2013-14 — spelt out in the 2008 budget.

Note the elimination of the second top rate, which Albanese has now retained at the level of 37%. It is ironic that a tax policy goal of a previous Labor government is now being torn up by another Labor government just as it was about to be implemented.

Albanese says circumstances have changed, but is it just that Labor has changed from aspiration towards redistribution?

The same can be said of Labor’s stated 2008 goal of a 40% top rate by 2013-14. Although the sincerity of it is dubious — given that Labor had already rejected the cut to 42% in the 2007 election campaign — the fact remains that the adoption of such a goal by Labor today would be unimaginable. For that matter, the Coalition had nine years in office but never even attempted to cut the top rate.

We will probably be stuck with the rates and thresholds that take effect on 1 July for a long time, which is one of the tragedies of the backflip.

We have a ‘once in seven to 10 years’ tax cut shaped by the ephemeral pressure of a cost of living issue and an imminent by-election. It could be a long time before the stars align for another tax cut shaped by aspiration and incentive.

Robert Carling is a Senior Fellow at the Centre for Independent Studies and a former IMF, World Bank and federal and state Treasury economist.

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