The tax cut that will only buy you a coffee

Hard-pressed taxpayers will welcome any relief, but the modest size of the unexpected personal income tax cut in this week’s federal budget — at most $5 a week from July 2026 and $10 from July 2027 — makes it a sitting duck for ridicule.

In 2003 as a senior minister, Amanda Vanstone coined the term ‘sandwich and milkshake’ to characterise the small tax cut included in that year’s budget, which was $4 to $11 a week for most taxpayers.

After 23 years of inflation, that kind of money won’t even pay for the sandwich and milkshake today, even if it did then.

Most tax cuts since 2003 have passed the sandwich and milkshake test, but the 2026 version, at $5 to $10 a week, is more like a ‘cup of coffee’ cut.

Flippancy aside, every income tax cut is welcome and this one deserves to be assessed on its merits. Does it relieve bracket creep? Does it stop personal income tax becoming ever more dominant as a source of revenue? Does it improve incentive?

The budget papers admit the tax cut is a modest cost-of-living relief measure, but go on to spin it into something it isn’t. Combined with this year’s stage 3 cut, it is said to be really large. But why combine them other than to exaggerate?

The Treasurer says he is handing back the revenue from bracket creep, but this is true only in a very limited way. The tax cut carves $3 billion out of revenue in 2026/27 and $6.7 billion in 2027/28 — amounts that are in the ballpark of bracket creep effects in one and two years.

But on another view, the government is just handing back the upward revision to income tax receipts since last year’s budget. The new estimate in 2027/28 with the new cut included is exactly the same as last year’s: $393 billion. And it is still relying on bracket creep to whirl the budget back to balance in 10 years.

Let’s look at bracket creep from an illustrative taxpayer’s perspective. Before this tax cut, someone on $100,000 this year would have seen their annual tax increase from $22,788 to $39,057 over 10 years with income growth of 4% a year. Their average tax rate would increase from 22.8% to 26.4%.

After the tax cut in this budget, the figures in year 10 will be $38,521 and 26.0%. The average tax rate increases by 3.2 percentage points instead of 3.6.

That’s lower, but there’s still a lot of bracket creep going on. With full annual indexation of bracket thresholds instead of the tax cut in this budget, their tax in year 10 would be $33,724, which is $4,797 less than under the tax rates and thresholds of this budget. In other words, this tax cut is worth about 10% of full indexation up to the tenth year.

Over the whole 10 years, this taxpayer will still be paying $19,912 more than in the full indexation case, which is a saving of about 19% from the $24,468 more they would have paid without this budget’s tax cut.

In the case of a $50,000 taxable income, under this budget the average tax rate will increase from 12.8% currently to 18.0% over 10 years, compared with 18.8% otherwise — which is still a large increase of 5.2 percentage points due to bracket creep.

This taxpayer’s tax cut over 10 years is $4,556, which represents a saving of 20% compared with the no tax cut case, but which pales in comparison with the $22,911 benefit from 10 years of full annual indexation.

The cost of living relief from this tax cut is extremely modest.

But tax cuts are best considered not as a response to ephemeral cost of living pressures but as a lasting improvement in incentives. This budget cuts the 16% marginal rate to 14%. Cutting any marginal rate is good for incentive, and marginal rate cuts are a worthy alternative to bracket threshold adjustments.

But was this the best way to cut marginal rates, leaving the higher rates unchanged? It is hard to believe that cutting the (already low) lowest marginal rate will be more effective than cutting the upper rates of 30, 37 and 45%.

Indeed, this tax cut is an insult to those on the higher marginal rates who pay most of the income tax. It comes on top of the emasculation of their benefit from the previous government’s stage 3 tax cut which would have eliminated the 37% band.

Notwithstanding the incentive considerations, this government appears to have chosen a cut confined to the lowest rate so that it could stick to its ‘tax cut for everyone’ slogan.

So we have the ‘cup of coffee’ cut, 23 years after the ‘sandwich and milkshake’ cut. At least the sandwich and milkshake cut turned out to be just a first step in a stream of much larger cuts that followed.

That, unfortunately, is not likely to be so of the cup of coffee tax cut.

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

Photo by Jason Villanueva