Earlier this week, Prime Minister Anthony Albanese began announcing the overhaul of the ‘stage 3 tax cuts’; one of the ALP’s major 2022 election commitments.
Albanese promised on Monday to “put extra dollars” in low and middle-income earners pockets while supposedly reducing tax cuts for high earners.
In a radio interview on Tuesday the PM said, “what we’re doing is looking at how we can help low and middle-income earners. Middle Australia, particularly, is doing it really tough.”
The ‘stage 3 tax cuts’ were introduced in parliament in 2019 and were intended to provide Australian taxpayers relief from “bracket creep” – a situation where income growth due to inflation causes higher taxes.
In response, the Coalition created a model where everyone earning between $45,000 and $200,000 paid 30 percent in tax from July 2024, reduced from a previous 37 percent.
Under the proposed changes, someone earning $100,000 a year would get a tax cut of $2,179 and someone earning $180,000 would get a cut of approximately $3,700.
The Parliamentary Budget Office estimated the plan would cost the government $313 billion in lost revenue over ten years.
During the 2022 federal election, the ALP adopted the same Jobseeker policy and legislation tax package as the LNP – a strategic choice to avoid the losing battle Labor faced on tax policy reform in the 2019 election.
However, the original stage 3 cuts move the current tax system further away from a progressive tax system, where higher income earners pay a larger proportion of their incomes than people who earn less.
After a Labor caucus in Canberra on Wednesday, where an overwhelming number of MPs backed changes and a majority of cabinet greenlighted the policy, the government announced they will retain the 37 percent tax rate. However, the range this applies to will change. The next change includes lowering the 19 percent tax rate for those earning under $45,000 to 16 percent.
Despite speculation, there will be no changes to the $18,200 tax-free threshold.
The government now claims the adjustments to the stage 3 tax cuts model are necessary due to the pressure on households increasing since the cuts were first legislated in 2019.
The changes are part of the government’s broader attempt to shift the narrative back towards their record on the cost of living – a situation the opposition continues to blame Labor for.
With a byelection in the seat of Dunkley scheduled on March 2nd and Labor’s poll numbers dropping, their ability to sell this change to voters with mortgages who fit within that middle income bracket is crucial.
Some in the Labor party are worried shifting the policy too much would cause a similar backlash the Gillard government faced when they introduced a carbon tax after promising not to do so.
Others in the caucus have privately suggested the party take a new tax plan to the next election, similar to what the government did when they promised to reduce superannuation tax concessions on accounts with balances over $3 million.
The Coalition had already reiterated that any shift in policy would constitute breaking an election promise. Shadow Treasurer Angus Taylor told the media he would “absolutely not” support any changes to the plan.
The Greens have consistently called on the government since 2019 to scrap the cuts altogether, and instead invest the money in affordable housing alongside an increase in welfare payments like Jobseekers.
Attempting to offer cost of living relief, Albanese and Treasurer Jim Chalmers, will have to endure a long legislative battle for fiscal stability in the hopes that voters will not consider this a “broken promise” but a sensible shift.
EDIT: This article was amended the figures on the 25/01 in the following: “under the proposed changes, someone earning $100,000 a year would get a tax cut of $2,179 and someone earning $180,000 would get a cut of approximately $3,700.”