Tax rise in Budget being considered for everyday Aussies

Australians are deeply worried about the surging cost of living, and next week’s Federal Budget is the government’s best opportunity to address those concerns before facing the potential wrath of voters in May.

Bartender Luka Hackett reflects how many Australians are feeling.

“When you go out to buy things, whether it be groceries, or even just like recreational things, you do kind of see it piling up a lot faster than it used to,” he told ABC News.

Westpac’s monthly consumer confidence survey for March echoed this concern.

It dropped to 96.6, meaning pessimists outnumbered optimists for the first time since September 2020.

One concern stood out.

“It is inflation news that has really exploded,” noted Westpac’s chief economist, Bill Evans.

“A year ago, just 8.6 per cent of respondents recalled news on inflation. That proportion jumped to 38.7 per cent in March, a 14-year high.

“The proportion viewing inflation news as negative is a very high 83 per cent.”

On top of that, more than two-thirds of Australians expect interest rates to rise this year, adding to cost-of-living concerns for many home owners.

Budget tax challenge

The government would no doubt like to blunt those worries in its Budget, ahead of the election expected in May, but it is handicapped by the cost of tax cuts legislated before the pandemic and the temporary Low and Middle Income Tax Offset (LMITO), dubbed the ‘lamington’, that has already been extended twice during the pandemic.

A balding man in a suit stands in front of an Australian flag touching his eyebrow.
Federal Treasurer Josh Frydenberg has a difficult decision about what to do with the Low and Middle Income Tax Offset. (Nick Haggarty)

“That actually meant low- and middle-income people were, in effect, getting a double tax cut at that time. That was done for economic stimulus,” explained the Grattan Institute’s chief executive, Danielle Wood.

“The challenge the government faces now is they would like to remove that, but what it will mean is that group of lower- and middle-income earners will effectively face a tax rise.”

Making that challenge harder for the government is that its expensive stage-three tax cuts — due to kick-in 2024-25 and expected to cost almost $100 billion in lost revenue between then and the end of the decade — overwhelmingly benefit higher-income earners.

“Our numbers show that the top 20 per cent of income earners will get about 75 per cent of the total value of those tax cuts,” Ms Wood added.

New figures from The Australia Institute analyse the distribution of the stage-three tax cuts, by occupation, if the LMITO is not extended out to 2024-25.

A bank chief executive could expect a tax cut of $9075, while a typical branch worker would end up paying an additional $878 to the government, compared to this financial year.

A surgeon would see the same tax cut as the chief executive, but registered nurses would pay $399 more to Canberra.

Tax change for an average registered nurse compared to a typical surgeon after stage 3 with no LMITO.
Tax change for an average registered nurse compared to a typical surgeon after stage three with no LMITO. (ABC News: Alistair Kroie)

An average barrister would keep an extra $3330, while the barista who makes their coffee would pay an additional $255 in tax.

A range of other low-income occupations, from retail staff and cleaners to hairdressers and kitchen hands, would also pay more tax without LMITO.

Overall, the research finds 80 per cent of workers will pay more tax after stage three if LMITO is removed, while people who earn more than $180,000 see the biggest dollar savings.

Tax cuts ‘more illusion than reality’

“The idea was that the so-called lamington would be gone long before the third-stage tax cut in 2024,” said John Quiggin, an economics professor at the University of Queensland.

University of Queensland economist John Quiggin at his laptop computer.
University of Queensland economist John Quiggin said the government will find it hard to wind back the LMITO, given looming tax cuts for high-income earners. (ABC News: Curtis Rodda)

“But we’re so close now that, to cut them out at this point would be raising taxes for most of us while substantially cutting taxes for high-income earners.”

Losing the LMITO could be argued to be the loss of a temporary stimulus payment rather than a tax increase, but ANU economist Ben Phillips said most workers have not really seen their tax bill fall, even with cuts.

“Average tax rates today are not really different at all to what they were in 2017,” Associate Professor Phillips explained.

“So the savings are more of an illusion than a reality.”

That is due to ‘bracket creep’, where workers fall into higher tax-rate brackets as their incomes increase with inflation.

Ben Phillips sits outside at ANU.
Associate Professor Ben Phillips said the recent tax cuts for low- and middle-income earners are barely keeping up with bracket creep. (ABC News: Ian Cutmore)

In fact, economic modelling by Associate Professor Phillips and his team showed average workers will be paying more tax by the end of the decade unless there are further cuts.

“Low- and middle-income households will be paying a higher rate of tax by the end of this decade, whereas the top 20 per cent will still continue to be paying a lower rate of tax by the end of the decade as a result of the 10-year tax plan,” he told ABC’s The Business.

Ms Wood said the Grattan Institute’s modelling matched up.

“The top 20 per cent will be paying a lower share of total tax than they were before the cuts, and the middle will actually be paying a higher share of total tax,” she said.

“On some measures, we find that the tax system will actually be the least progressive it has been since the 1950s.”

Luka Hackett pouring a beer at the music bar where he works.
Luka Hackett pouring a beer at the music bar where he works. (ABC News: Daniel Irvine)

“I can’t say I’m surprised,” responded Luka Hackett when told of these findings, “because these legislations, they’re passed through by the people earning that much.”

Whether or not the LMITO is retained for another year in next week’s Budget, there is speculation of a one-off “cost-of-living payment”, tipped to be between $200 and $400, to be paid before the election in May.

However, Associate Professor Phillips said both that and the LMITO tend to benefit the middle- and upper-class more than low-income households because they are paid through the tax system.

“Most of the money would go to middle- and high-income families,” he said.

“Roughly about 55 per cent would go to the top 40 per cent and about 16 per cent would go to the bottom 40 per cent.

“That’s largely because taxpayers in Australia, those who pay tax, tend to be higher-income persons, higher-income households.

“You’ve got about 5, 5.5 million Australians on welfare payments, say age pensioners, people on JobSeeker, parenting payments, and these people are typically not paying any taxes.”

Opportunity for ‘tax reform’

Ms Wood said that, with the blowout in public debt due to pandemic stimulus and costs, the government could reduce some other tax concessions that favour high-income earners in return for the income tax cuts heading their way.

Woman in red smiles at camera.
Grattan Institute chief executive Danielle Wood says 75 per cent of the tax cuts will end up going to the top 20 per cent of income earners. (ABC News: Peter Healy)

“Given where we find ourselves now, in terms of the budget position, it would make sense to re-evaluate both the scale and the design of those tax cuts,” she said.

“Things like the size of the capital gains tax discount, some of the superannuation tax concessions, I would argue [that], if you actually bundled that together with the stage-three tax cuts, you would reduce their fiscal impact, you would improve the distributional effects of those taxes and you’d actually get some tax reform on the way through.”

Professor Quiggin said the alternative to finding more revenue would likely be cuts to public services and welfare that would also mostly hit low- and middle-income households.

“What we’re seeing is reference to budget repair, which is a euphemism for spending cuts or austerity, and what we’re likely to see, whoever wins, after the Budget is a lot of cuts that haven’t been announced yet.”

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