Are the proposed personal income tax cuts affordable and fair?
Submitted to the Senate Economics Legislation
Committee Inquiry into the Treasury Laws
Amendment (Personal Income Tax Plan) Bill 2018, Monday 4 June
The Turnbull Government’s proposed personal income tax cuts are the largest ever proposed in a federal budget. As Grattan Institute’s Budget Policy Program Director Danielle Wood, CEO John Daley and Associate Hugh Parsonage write in this Senate inquiry submission, the substantial reduction in revenue is not obviously consistent with the Government’s medium-term fiscal strategy of budget surpluses on average over the economic cycle. On current projections these will be achieved only if Australia experiences a lengthy period of unprecedented economic calm and fiscal restraint. While fairness is in the eye of the beholder, the tax plan should be evaluated relative to the progressivity of the income tax system today. Without tax cuts, the income tax system will become less progressive. Bracket creep has the biggest effect on the average tax rates of tax-filers in the middle of the distribution (who earn around $44,000 a year). The tax plan does not unwind the reduction in progressivity as a result of bracket creep. The plan reduces average tax rates by about 1 percentage point for most taxpayers. But it reduces average tax rates by substantially more for the top 20 per cent of taxpayers – except for the top 1 per cent of income earners. As a result, by 2027-28, about 3 per cent of the tax burden will be shifted from the top 20 per cent of income earners to those lower down.