Stage 3 Tax Cuts: Sliced and diced

The Stage 3 tax cuts have been to the butcher shop and carved into new cuts.

What has been minced is the political element of this, i.e. broken promises, bracket creep, rich people were getting too much, low-income earners need it to meet cost of living etc., but if we slice through the politics, there’s way more to consider…

I’ll refer back to an article I read in the AFR in June last year; I remember reading it and thinking that I’d be amazed if Stage 3 tax package gets through uncut, even though it was already law. Essentially, the article suggested that the top income earners pay a disproportionate amount of tax, which is the basis of a marginal tax rate system, but the question today of what is “too much” is like a red rag to a bull for those feeling the cost-of-living pinch.

I get hung up on 3 points of data in the article:

1. In 2020/21, the highest 11% of taxpayers paid 50% of total income taxes paid (by $). In the same year, the highest 1% of taxpayers contributed the same amount of income tax as the lowest 63% of taxpayers.

More recently with the proposed Stage 3 amendments, it’s been estimated by Economist Chris Richardson that the top 1% will pay the tax equivalent of more than 70% of the lowest taxpayers.  

2. In March 1983 the average household income tax rate was 12.5% of gross income. In March 1993, it was 13.6%. In March 2013, it was 12.7%. But in March 2023, it jumped to 16%! Time will tell but I expect in March 2024, it will be higher again given the current marginal tax rates and inflation/ wages increases.

Herein lies my main concern: Income tax by household for everyone is up massively relative to most other times in the past 40 years. The political argument of who deserves a tax cut more (rich vs poor) is sausage filler disguised as “cuts” because the real argument should be whether the government justifies keeping so much more per taxpaying household. If nothing else changes in the next decade, apparently the government’s proposed Stage 3 amendments will attract $28 billion in extra tax receipts. Given record government spending, are they using it so well we should be paying more now (by %) than before?

3. Aside from above, the AFR article highlights more than 50% of all federal government revenue comes from income tax paid.

Do we really want to have a tax system where we are locking in federal expenditure on the absolute hope that the top 1% can keep paying around 20% of all income taxes each year? To be clear, I’m not saying the 1% shouldn’t pay higher taxes, but we have no resilience as a nation if there’s a downturn and the 1% can’t pay as much.

Structurally, I think that is a massive issue and I can understand the calls for major tax reform. The potential negative consequences are much more severe than distractions of whether one Prime Minister bought votes by promising tax cuts years in advance or the next Prime Minister lost votes for breaking his promises.

So, I’m not surprised the Stage 3 tax cuts will be changed where some will be better off, some worse off. 

For those better off, it’ll help with cost of living.

For the worse off, I hope that the extra tax contributions are used to reduce debt which accelerates a positive general budget outlook for our future generations and reduces the reliance of the 99% on the 1%.

Either way, the political spin will feel like death by a thousand cuts…

For those who know me, you’ll know I’m always happy to discuss further!

Financial Planner AFP® | B.App.Fin | Authorised Representative No. 311745

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