Budget 2018 – Tax

KEY POINTS

  • Budget revenues are projected to rise by $32B over the next four years, underpinned by growth in wages and profits (which many warn will not occur). The Government proposes to give away about half of this ($15B) through personal tax cuts and abandonment of the 0.5% Medicare Levy increase.
  • Beyond that, against the backdrop of an arbitrary 23.9% of GDP ”cap” on tax revenue, it proposes another $127B in personal tax cuts from 2022, on top of the $65B in company tax cuts.
  • This is not responsible budgeting, given no actual surplus has been delivered, and social spending falls well short of need for poverty-alleviation (no increase in NSA!), affordable housing, health, education and community services.[1]
  • After 2022, they go almost exclusively to the top 20% on $85,000 and above, reaching a cumulative value of $227pw for those earning $200,000 or more.
  • There is modest but welcome action to curb tax avoidance by tightening the tax treatment of multinationals, trusts, and the ”black economy”, though the Opposition has taken stronger action.
  • Average real growth in budget spending from 2014-17 was just 1.9%, the lowest for 50 years. It is projected to drop to 1.6% over the next four years (below population growth!). This is clearly unsustainable if essential services are to be ‘guaranteed’ for all as the government claims.
  • In its Budget reply, the Opposition outbid the Government on its first round of tax cuts, increasing them by 75% for those earning less than $125,000, but has not committed to later rounds.
  • This could be the start of race to the bottom on income tax cuts that jeopardises future essential services and is little or no benefit to the lowest 40% of households, including most people who rely mainly on social security, and most part-time workers. They are the ones with most to lose.

[1] Even if these service gaps aren’t addressed, governments will need an extra $20B a year by the mid 2020s, just to continue existing programs. See PBO (2017) Medium-term budget projections.

WHAT’S IN THE BUDGET?

In addition to last year’s cuts in company tax for small and medium sized companies and personal income tax for people earning over $80,000, the Government proposes two sets of income tax cuts:

  • Extending the company tax cut (from 30% to 25%) to those with turnover above $5 million [costing $1.8 billion in 2019, rising to $14 billion in 2026 and at least $65 billion over 10 years], with some tightening of tax treatment of multinationals, trusts, and the ”black economy’’ to curb avoidance.
  • Three rounds of personal tax cuts over the next seven years:
    (1) From 2018: A Low and Middle Income Tax Offset (on top of the existing Low Income Tax Offset) worth up to $10pw for people earning $21,000-$125,000, plus a further increase in the lower threshold for the 37% rate from $87,000 to $90,000, worth $3pw for those earning over $90,000
    (Cost: $13B over four years);
    (2) From July 2022: The new tax offset is removed, the lower threshold of the 32% bracket is lifted from $37,000 to $41,000, the LITO is increased from $445 to $645 p.a., and the lower threshold for the 37% rate is lifted from $90,000 to $120,000;
    (3) From July 2024: The 37% tax bracket is abolished altogether, so that people earning $41,000-$200,000 all share a marginal tax rate of 32% (Table 1)
  • The overall cost of the package is $140B over seven years (and $25B per year from 2024).
  • The Medicare Levy increase for NDIS has been abandoned (costing another $13B over 4 years).
Table 1: Existing and proposed 2024 personal income tax rates
Sources: Australian Government (2018): Budget Paper 1:  Budget Strategy and Outlook; Shorten (2018) Budget reply, Canberra; Distributional data: Parliamentary Budget Office (2017), Changes in average personal income tax rates: distributional impact, Report No 03/2017; 2018 Budget Papers at https://www.budget.gov.au/2018-19/content/jobs.html   Note: First round only: after 2022 the Government’s tax cuts are much higher for high-earners

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LABOR’S BUDGET REPLY

Labor opposes the extension of last year’s cuts in company tax to larger companies, proposes to increase the Government’s Low and Middle Income Tax Offset (LMITO) by 75%, and reserves its position on the later rounds of the Government’s tax cuts: [1]

  • From 2018: A ‘Working Australians Tax Refund’ is proposed in lieu of the LMITO, worth up to $18pw for people earning $21,000-$125,000 (Cost: $19B over four years).

[1] Labor supports the proposed increase in the lower threshold for the 37% rate from $80,000 to $90,000 from July 2018.

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ACOSS COMMENTARY

First round of personal tax cuts (2018-22): Government and Labor packages

This round mainly benefits ‘’upper-middle” income-earners, especially fulltime male workers (Table 2):

  • people earning less than $21,000 (roughly the lowest 20%) get nothing;
  • those on $21-37,000 (the 2nd 20%) get up to $4pw ($7pw in Labor’s package);
  • those on $37-48,000 (the 3rd 20%) get $4-10pw ($7-$18pw in Labor’s package);
  • those on $48-$90,000 (the 3rd & 4th 20%) get $10pw ($18pw in Labor’s package)
  • those on $90,000-$125,000 (the top 20%) get $10-$3pw ($18-$3pw in Labor’s package);
  • those on $125,000+ (top 10%) get $3pw [1]

[1] These figures include people out of paid work, who generally don’t benefit from income tax cuts. We understand Labor proposes to increase the LMITO rates by 75% and tighten the personal income test so that it is reduced by 2.6 cents instead of 1.5 cents for every dollar earned over $90,000.

Table 2: Tax cuts by income level in the first round (Government and Labor) 2018-22

Sources: Australian Government (2018): Budget Paper 1:  Budget Strategy and Outlook; Shorten (2018) Budget reply, Canberra; Distributional data: Parliamentary Budget Office (2017), Changes in average personal income tax rates: distributional impact, Report No 03/2017; 2018 Budget Papers at https://www.budget.gov.au/2018-19/content/jobs.html Note: First round only: after 2022 the Government’s tax cuts are much higher for high-earners
Later rounds: Government package (2022-25) – impact on individuals

Table 3 shows the impact of the later rounds of the Government’s tax cuts on individuals.

  • Both rounds (2022 and 2024) mainly benefit the top 20% of individuals by income, those earning over $85,000.[1]
  • The 2022 round limits tax cuts for those earning less than $90,000 to $10pw at most, because the rise in the $37,000 threshold and increase in the LITO is offset by removal of the LMITO.
  • Those earning over $90,000 get an extra tax cut as the $90,000 threshold is lifted to $120,000.
  • The 2024 round (abolition of the 37% tax bracket) mainly benefits those earning over $120,000. Those earning $200,000 or more get an extra $139pw (and $227pw from all rounds)
  • People earning from $41,000 to $200,000 would all share the same 32.5% marginal tax rate.

[1] Note that we were not able to model changes in the distribution of incomes from 2018 to 2024. For example, if wages grow by a uniform 2.5% p.a., these thresholds would each be 17% higher so that $85,000 becomes $100,000.

Table 3: Tax cuts by income level in later rounds (Government package) 2022-25

Sources: Australian Government (2018): Budget Paper 1:  Budget Strategy and Outlook; Shorten (2018) Budget reply, Canberra; Distributional data: Parliamentary Budget Office (2017), Changes in average personal income tax rates: distributional impact, Report No 03/2017; 2018 Budget Papers at https://www.budget.gov.au/2018-19/content/jobs.html   Note: Individuals are divided into five equal groups by taxable income, so thresholds are not the same as tax brackets. Tax cuts are then modelled for individuals on the average pre-tax income for each of the five groups. * Cumulative impact of all tax cuts over 6 years, expressed in 2018 dollars. These income gains would be partly offset by bracket creep over the period.
Later rounds: Government package (2022-25) – impact on households

The average impact of the whole package on each 20% of households is also regressive, rising from a 0% increase in disposable income for the lowest 20% to up to 4.6% for the top 20% (Figure 1).[1] This is mainly due to the 2022 and 2024 rounds, both of which predominantly benefit the top 20%.

Figure 1: Who gets the Government’s tax cuts? Percentage change in disposable income by household income level

Source: NATSEM 2018: How does the Budget affect us?

 

Note: Q2, Q3 etc. refers to each 20% of households by pre-tax income. Lowest 20% receives $0


[1] The impact on households is different to individuals since many households have more than one income earner. The graph also adjusts household incomes for the size of households.

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MISSING IN ACTION

  • The tightening of tax loopholes for multinational companies, trusts, and the black economy in the Budget is welcome though modest.
  • Much more action is needed on trusts, capital gains, negative gearing, and superannuation.
  • The Government’s arbitrary 23.9% of GDP cap on tax revenue would put a straightjacket on future budget spending, making it harder to guarantee essential services, reduce poverty and improve housing affordability, and harder to build a budget surplus that’s adequate to respond to the next economic down-turn.
  • The Opposition has committed to more thorough-going reform of the taxation of trusts, capital gains and dividend imputation to strengthen the income tax base, but there is a risk that the revenue benefits are lost in a tax cut war between the parties.