Bringing forward the next phase of income tax cuts will deliver a windfall to high-income earners, with 91% of the benefits going to just 20% of taxpayers, according to The Australia Institute.
The progressive thinktank released research on Monday that suggested the bottom half of taxpayers would gain just 4% of the revenue from the second phase of income tax cuts. The institute challenged the government and Labor to find a fairer form of stimulus.
The Coalition’s tax cuts, which were legislated with Labor and crossbench support, will lift the upper threshold of the 32.5% tax rate from $37,000 to $45,000 and the 37% bracket from $90,000 to $120,000, replacing the low and middle income tax offset in the second phase from July 2022.
The Australia Institute paper found that the second phase tax cuts “will only benefit 40% of taxpayers” – mostly in the top three income deciles – and a small group earning between $37,000 and $48,000. Most taxpayers (60%) would receive “no benefit”.
Someone earning a very high income of $200,000 would receive a $2,430 a year tax cut, while a person on the median income of $60,000 gets nothing, and a minimum wage earner on $40,000 receives $110.
“The top 20% of taxpayers will get 91% of the benefit and the top 10% will get 52% of the benefit.”
In the third phase, tax rates are flattened on incomes between $45,000 and $200,000 from 32.5% to 30% from July 2024.
If both the second and third phases are brought forward to 2021-22, a person on a very high income will receive a tax cut of $11,505 a year, while a person on the median income receives $380 and a person on the minimum wage gets $110.
The top 20% of taxpayers will get 79% of the benefit of the two phases combined, while the bottom half of taxpayers receives just 3%.
The Australia Institute paper, by senior economist Matt Grudnoff, concluded that bringing forward the income tax cuts was an “ineffective stimulus”.
He cited the “simple fact of economics that high income earners are more likely to save or pay down debt with the tax cuts, rather than spend the extra funds to help stimulate the domestic economy”.
“A more effective way to stimulate the economy would be to invest heavily in direct employment programs or focus on supporting those who are doing it tough by maintaining or increasing the current rate of the jobseeker supplement.”
After Australia officially entered recession on Wednesday for the first time in 30 years, the treasurer, Josh Frydenberg, held out tax relief as a fresh form of stimulus to be delivered in the October budget.
Business groups including AiGroup and the Business Council of Australia have both called for tax cuts to be brought forward to boost the economy.
When it helped pass the tax cuts in July 2019, Labor supported the second but not the third phase.
The shadow treasurer, Jim Chalmers, said on Wednesday that Labor has offered to “keep an open mind” about the second phase because it understands “middle Australia needs help now”. But rather than a hard proposal the government had offered only “smoke signals”, he said.
On Friday, Scott Morrison refused to buy into speculation that the stimulus will bring forward the already legislated increases.
Asked if the government should restructure the tax cuts or else high income earners will bank $11,000 while low income earners receive $255 a year, Morrison told reporters in Canberra the question was “speculative”.
“I understand what the current legislative program is and that is the legislative program, and any changes we might make to that will be announced in the budget, and that’s in October.”