The Budget is about priorities
The great thing about the federal budget is it shows what the government’s real priorities are. Politicians spend the rest of the year telling everyone how important their particular issue is but it is only at budget time that we see if the government really thinks it was important enough to fund.
As you listen to the endless budget interviews from the Treasurer and Prime Minister you’re going to hear them say things like “well that’s all we can afford at this time.” What this actually means is we didn’t think it was important enough to fund. We thought other things were more important. The government has hundreds of billions of dollars to spend. It can afford to fund anything it wants but it can’t afford to fund everything it wants. So ‘we can’t afford that’ actually means we want to fund other things.
This means the budget should be looked at it two ways. What are the things the government thought were important, that is the things it decided to fund. But also what were the things the government didn’t think were important, the things it chose not to fund.
The centrepiece of the budget is an enormous income tax cut over 7 years. This is unusual because the budget papers only show the impacts of policy changes over 4 years. The big parts of the tax cuts start in the 5th year, just outside the budget’s forward estimates; hiding the real impacts of these tax cuts from public view.
This tax cut is a radical change to our income tax system. It is not simply an income tax cut but rather it is moving Australia to a flat tax. The jewel in the tax system is the progressive nature of our income tax. It means those who can afford to pay more do. Moving from a progressive system to a flat tax system means a big tax cut for those at the top and very little for those at the bottom. If this tax cut is implemented in full then those on low incomes will be paying a bigger share of total income tax and those at the top will be paying a smaller share.
A simple way to look at this is to compare two taxpayers. Someone earning $40,000 per year will get a tax cut of $455 per year, while someone earning $200,000 will get a tax cut of $7,225 per year. Some might say that of course someone on $200,000 will get a bigger cut, after all they pay more tax. But someone on $200,000 earns 5 times more than someone on $40,000, but their tax cut is 16 times larger.
This is the problem with flattening our progressive tax system. High income earners will get an oversized tax cut, completely out of proportion to their incomes.
At the Australia Institute we have been calculating how much of the tax cut will go to high income earners and how much goes to middle and low income earners.
Using the latest taxation statistics we have constructed a model of income tax. We have broken all taxpayers into 100 groups from the lowest income earners to the highest. Inflating income by nominal GDP and calculating how much each group pays as the income tax cut is introduced; we can calculate the amount of the tax cut each income group gets.
We then split Australian taxpayers into three groups, high income earners (those in the top 20% of taxpayers), low income earners (those in the bottom 30% of taxpayers) and middle income earners (the remaining 50% of taxpayers).
The table below shows how much of the tax cut each group gets after the tax cut is fully implemented in 2024.
High income earners are by far the biggest winners from this tax cut. They get about twice the proportion of the tax cut as middle income earners, despite the fact that there are less than half as many as there are middle income earners. High income earners get over 60% of the tax cut, while middle income earners get only about 30% of the cut.
Low income earners largely miss out, getting only 7% of the value of the tax cut. This means high income earners get about 9 times more in tax cuts than those at the bottom.
If we look even more closely, we see that the further up the income scale you go, the bigger the benefit. While the top 20% (high income earners) get 62%, the top 10% (very high income earners) get about 40% of the tax cut.
If we look more closely at low income earners we see that while the bottom 30% (low income earners) get only 7% of the cut, very low income earners (the bottom 10% of taxpayers) get just 1.5% of the tax cut.
The figure below shows the proportion of the tax cut going to each decile.
While this tax cut has some parts that are designed to give relief for those on middle and low incomes, it is clear that the actual result of this tax cut is to hand out billions of dollars to high income Australians.
Learning from history
Cutting income tax because we experience an upswing in the economy is something we have seen before and last time it didn’t end well. Howard and Costello cut taxes and increased spending during the mining boom, in the process destroying the ability of the budget to raise revenue in more normal economic times. The result was 10 years of deficits with the current government using them as an excuse to cut government services.
The massive tax cut proposed in this budget could well have the same effect. This means if the massive income tax cut for high income earners is passed then in future we could be facing a similar budget to the 2014 horror budget when school funding, welfare, hospital funding, and higher education were cut.
We have seen this movie before. Slashing income taxes just leads to deficits further down the track and more horror budgets.
LITO versus income tax cuts
One interesting aspect of this year’s budget is that high income earners are getting traditional tax cuts (that show up as an increase in your income each payday.) While those on low and middle incomes are getting a tax refund (that only shows up after you do your tax return.)
So when would it be most helpful for those on low incomes to get their tax cut? While a lump sum at the end of the financial year is nice, most people on low incomes live paycheck to paycheck and a lump sum at the end of the year doesn’t pay for groceries, it doesn’t put petrol in the car and it doesn’t pay for the kids’ school excursions.
So why is the government choosing to give tax cuts this way to low income earners? The answer goes back to Amanda Vanstone’s ‘hamburger and a milkshake’ tax cut. The government is actually giving very little to those on low and middle incomes, only around $10 per week. While $10 per week doesn’t sound like much a $520 bonus at the end of the year sounds like so much more. But some quick calculations show they are actually the same. Politicians have learned that if you’re handing back a small amount it’s better politically to give it as an annual lump sum rather than give it out weekly.
So low income earners are missing out on help each payday because of the political optics of the tax cut.
From all of the team at The Australia Institute, thanks for reading.
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