Title : Comparing Coalition and Labor income tax plans
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Comparing Coalition and Labor income tax plans
Income tax cuts are set to be a central issue in the election campaign, with Labor trumpeting bigger tax reductions for lower-income earners than the Coalition, and the Government boasting of its long-term tax cuts.
So what tax cuts are the two parties promising, when will you see them, and can the budget afford them?
Immediate tax cuts from both parties
In the short term, there is not a huge difference between the Coalition and Labor on income tax cuts.
Both are proposing to increase a tax offset for low- and middle-income earners. If eligible, you will receive it when you submit your tax return — so it will either be part of your refund or reduce any tax debt you owe the Australian Taxation Office (ATO).
In both cases, the tax offset will be backdated to the current financial year, so you will get it when you submit your next tax return some time after July 1 this year.
The main difference between the two is that Labor has now promised to ramp up the tax offset for 3.6 million people earning less than $48,000 a year.
Workers earning up to $37,000 would receive a $350 tax offset, which would then increase to a peak offset of $1,080 for people earning taxable incomes between $48,000 and $90,000, before gradually reducing to zero at a taxable income of $126,000.
The Government's low-income tax offset announced in its Budget starts at $255 and then ramps up in a similar fashion to the same maximum of $1,080 between $48,000 and $90,000.
What Budget 2019 means for you:
For those earning below $37,000 a year, Labor's announcement offers an extra tax cut of $1.83 per week over the Government — not even a short bus fare in Australia's biggest cities. But for the majority of workers, both parties' tax-cut plans are the same.
But don't think higher-income earners get nothing. Both parties are offering an increase in the 37 per cent tax-bracket threshold to $90,001 from $87,001 currently.
This means any dollar earned between $90,001 and $180,000 will now be taxed at 37 per cent, rather than every dollar between $87,001-$180,000 being taxed at this rate.
Combined with the middle-income tax offset, it will save someone on $90,000 a year taxable income $1,215 a year in tax, making them the biggest winners in dollar terms from either party's short-term tax plans, while people earning above $126,000 a year will save $135 per annum.
| Taxable income | Liberal plan phase 1 | Labor plan phase 1 |
|---|---|---|
| $25,000 | $225 | $350 |
| $30,000 | $225 | $350 |
| $35,000 | $225 | $350 |
| $40,000 | $480 | $549 |
| $45,000 | $855 | $881 |
| $48,000 | $1,080 | $1,080 |
| $80,000 | $1.080 | $1,080 |
| $100,000 | $915 | $915 |
| $120,000 | $315 | $315 |
| $140,000 | $135 | $135 |
| $160,000 | $135 | $135 |
| $180,000 | $135 | $135 |
| $200,000 | $135 | $135 |
In short, the Opposition is essentially planning to retain stage one of the Government's already legislated tax cut plan, but to ramp up payments to low-income earners slightly.
Long-term differences in tax plans
But, while the two major parties' short-term tax plans are virtually identical, their long-term plans are poles apart.
The Parliament has already legislated the Government's original tax cut plan, outlined in last year's Budget, and which Labor has pledged to try and repeal if it wins office.
That legislation will see the top income threshold for the 19, 32.5 and 37 per cent tax brackets rise from July 2022, before the 37 per cent bracket would be eliminated in July 2024 and the threshold for the top 45 per cent tax rate increased to $200,000.
As they have already been passed by Parliament, these tax changes will occur unless repealed.
In this year's Budget the Government extended that tax plan by raising the low-income tax offset to $700 from 2022-23, further raising the top income threshold for the 19 per cent tax bracket and lowering the tax rate in the middle tax bracket from 32.5 to 30 cents.
Unlike the immediate elements of the Government's tax plans, these longer-term changes mainly benefit people earning more than $90,000 a year.
The Government's budget figures show the 2022-23 changes would deliver an extra $100 a year to people earning $40,000 and another $225 a year in take-home income to someone on $45,000.
But other low- and middle-income earners on $90,000 or less see no additional benefit to what they will have already received this financial year.
There are some additional tax benefits for middle income earners in 2024-25, when the tax plan takes full effect, but those earning less than $37,000 a year get no additional tax relief beyond this year.
The Budget shows someone earning a $50,000 taxable income will save $1,205 in 2024-25, someone on $80,000 will pay $1,955 less income tax, a person on $120,000 will save $4,440, while all those on taxable incomes of $200,000 and above will save $11,640 a year in tax.
| Budget 2019 tax cuts | |||
|---|---|---|---|
| Income | Tax cut from 2018-19 | Tax cut from 2022-23 | Tax cut from 2024-25 |
| $30,000 | $255 per year | $255 per year | $255 per year |
| $60,000 | $1,080 per year | $1,080 per year | $1,455 per year |
| $90,000 | $1,215 per year | $1,215 per year | $2,340 per year |
| $120,000 | $315 per year | $2,565 per year | $4,440 per year |
| $150,000 | $135 per year | $2,565 per year | $6,540 per year |
| $180,000 | $135 per year | $2,565 per year | $8,640 per year |
These extra tax cuts will need legislation to be brought before Parliament and passed before they take effect.
Labor's long-term tax plan is simple in comparison.
Other than the immediate tax cuts, mainly directed towards people earning $90,000 a year or less, Labor plans to put things back the way they were before the Government's changes in last year's budget.
That means no further tax cuts beyond those both parties are promising for 2018-19 (outlined above).
Instead, Labor says it will deliver further income tax cuts when it knows what the future economic circumstances are, rather than legislating them years in advance as the Government has done.
Who gets what?
The second and third stages of the Coalition's tax plan, which come into effect in 2022 and 2024, provide the greatest dollar benefits to the nation's highest-income earners.
Research from left-leaning think tank The Australia Institute shows 34 per cent of the benefit goes to the top 10 per cent of taxpayers, and more than half (54 per cent) goes to the top 20 per cent, while only 3 per cent of the benefit goes to the bottom 20 per cent of income earners.
"Flattening income tax reduces the tax take from high-income earners, which ultimately means either fewer government services or high taxes on middle and low-income earners if the government wants to maintain a surplus," said the Institute's senior economist Matt Grudnoff.
"Flattening tax rates will see an executive on $195,000 pay the same marginal tax rate as someone on $45,000, which is little more than the minimum wage."
However, those higher-income groups already pay a greater share of the total tax take, with the Government saying that the top 20 per cent of taxpayers currently pay 60.6 per cent of income tax, and this would only fall slightly to 59.5 per cent in 2024-25 under its tax plan.
Other analyses show all income groups will be better off than they would be under the old tax scales.
Modelling by Ben Phillips and Matthew Gray at the Australian National University's Centre for Social Research and Methods looked at the impact of bracket creep — where wage rises push people into higher tax brackets.
"We take account of wages growth and consider a household's average tax rate rather than focusing on dollar gains," ANU research fellow Dr Phillips explained.
The centre's modelling shows, without the latest round of tax cuts, average tax rates would have continued rising to reach a record level over the next 10 years.
"The 2019 Budget tax cuts would see the average tax rate continue to increase to 2024, and then the significant 2024 tax cuts would see rates modestly below current levels," Mr Phillips said.
"By 2029 the tax rates would again be higher than current levels."
Mr Phillips cautioned that average tax rates would be lower all around if wage growth falls short of Treasury's prediction of a return to annual increases of 3.5 per cent. Wage growth is currently at 2.3 per cent.
Separate analysis by Deloitte Access Economics also shows average tax rates would fall across all income levels under the Coalition's plan.
Deloitte partner Chris Richardson also argued that the relevant numbers are the percentage changes, not the dollars, since people at the top-end get bigger tax cuts because they pay more dollars in tax.
His analysis of average tax rates shows that someone on $50,000 will still pay nine times as much tax as someone on $25,000; someone on $100,000 will still pay 29 times as much tax as someone on $25,000; and someone on $200,000 will still pay 75 times as much tax as someone on $25,000.
However, Deloitte's figures also show that the biggest percentage decline in average tax rates under the Government's plan will go to people earning around $200,000 a year.
Matt Grudnoff said the Government's plan would make income tax flatter and less progressive.
"If this income tax plan comes into effect, it will mean that in the future those on higher incomes will pay less tax as a proportion of their income and the amount of income tax collected will be far less," he said.
He said the gender split of the initial, largely bipartisan, income tax cut is fairly even, with women getting 47 per cent of the tax cut and men getting 53 per cent.
However, Mr Grudnoff said it was a different story for the Government's planned tax cuts in 2024-25.
"For every dollar of tax cuts females get, males get two dollars," he said.
"The skewed gender distribution is in large part because males are over-represented at the top of the income distribution, who get most of the benefit of the tax cut, and females are over-represented at the bottom of the income distribution, who get very little of the tax cut."
Budget implications
The Government's income tax cut plans do not come cheap.
Treasury estimates that the original plan, passed by the Parliament last year, will cost the budget $144 billion over a decade, while the extra measures announced in this year's budget will slice a further $158 billion from revenue by 2029-30.
Much of this occurs after July 1, 2024, when the 37 per cent tax bracket is abolished, leaving all income between $45,001 and $200,000 taxed at 30 cents in the dollar.
Simply lowering the 32.5 per cent tax rate to 30 per cent will cost the Government $95 billion in lost revenue between 2024-25 and 2029-30.
However, Dr John Humphreys from right-leaning think tank the Centre for Independent Studies believes the loss in revenue from the latest tax cut plan will be substantially smaller than the $158 billion that Treasury expects.
He said that's because Treasury modelling doesn't factor in behavioural changes when assessing the revenue lost through the tax cuts.
"Using our dynamic tax model, we estimate that the proposed tax changes will cost the budget about $122 billion over the next 11 years," he wrote in a report.
"One of the consequences is that taxpayers have an increased incentive to earn and report taxable income, which helps to offset the cost of the tax cuts."
He also argued the Government should bring forward its planned 2024-25 tax cuts to the present, even though it might keep the budget in deficit for longer.
"Which is a small price to pay for arguably the most important piece of microeconomic reform in a generation, leading to higher productivity, giving people the double benefit of higher wages and lower taxes on those wages," Dr Humphreys added.
However, The Australia Institute's Matt Grudnoff has a very different view on the effect of the planned 2024-25 tax changes, saying they all but lock-in future cuts to public services.
"If the Government is committed to maintaining a budget surplus, this radical reshaping of income tax will only lead to spending cuts in the future," he said.
"Less spending on the services that Australians demand from their governments like health, education and aged care."
The Budget papers appear to bear out this forecast, with Government spending projected to fall from nearly 25 per cent of GDP currently to around 23.5 per cent towards the end of next decade in order to obtain and maintain a modest budget surplus.
In contrast, Labor's additional tax cuts for low-income earners only add an extra $1.05 billion over four years to the Government's phase one tax cuts for 2018-19, according to the shadow treasurer's office.
With additional revenue from its proposed changes to negative gearing, the capital gains tax discount and franking credit refunds, Labor will be on track to raise several hundred billion dollars in extra revenue over the next decade compared to the Coalition's plan.
Although, Labor said it will also offer further income tax cuts when it sees what the budget can afford in the future.
So the Coalition's Budget and Labor's Budget reply offer two very different long-term visions for the Federal Government — the former with lower, flatter income tax rates and probable cuts to some government services or payments at some point in the future, the latter with higher taxes to maintain spending on public services around current levels.
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