Tax cuts will boost economy as well as pay packets

In a major speech as the government intensifies its push for the revised stage three tax cuts to be passed by parliament, Dr Chalmers argued the package not only provided living cost relief but included much-needed tax system reform.

"This is relief and reform," the Treasurer said.

"By dropping two rates and lifting two thresholds we are reforming the tax system, returning bracket creep where it has the most impact, and providing cost of living relief, and reward for effort, right up and down the income scale."

Dr Chalmers told the McKell Institute that the government's tax changes include the first increase in the top tax threshold in more than a decade, will provide a bigger cut to 84 per cent of taxpayers and encourage more into the workforce.

"Overall, our plan provides superior relief and superior reform," he said. "It ticks three boxes by maximising cost of living help without adding to inflation and boosting capacity."

Under the government's proposal the tax rate for those earning less than $45,000 will be cut from 19 to 16 per cent, those earning between $45,001 and $135,000 will pay 30 per cent tax, down from 32.5 per cent, while taxpayers earning between $135,001 and $190,000 will pay 37 per cent. Those earning more than $190,000 will pay 45 per cent.

The Parliamentary Budget Office has released costings showing the revised tax changes will cost the budget an extra $8.3 billion in their first five years compared with the dumped plan, but will end of $5.5 billion cheaper over the next decade.

And while the government argues its tax cut changes are particularly targeted to boost the share going to middle income groups, the PBO analysis, produced for Greens leader Adam Bandt, shows that the biggest benefit will still accrue higher earners.

According to the PBO, next financial year the top 20 per cent will claim more than half the tax cut, worth around $11.7 billion, and those in the next 20 per cent down will share $6.1 billion (26.1 per cent).

But the proportion accruing to the top income earners reduces over time, and by 2033-34 the share going to the top 20 per cent will have declined to 46 per cent.

In the immediate term, the changes have prompted concerns that by pumping more money into household budgets they will fuel spending and add to inflation, potentially delaying any easing in interest rates.

The Opposition, which has still to decide whether or not it will support the revised tax cuts, has accused the government of having "no plan" to reduce inflation.

Opposition finance spokeswoman Jane Hume, who is chairing a Senate inquiry into living costs, said families were suffering.

"More working families, some on dual incomes, have been forced to turn to charities for assistance in getting their kids back to school and feeding them once they're at school," Senator Hume said.

"The only way to deliver cost of living relief for all Australians is to get inflation under control, but unfortunately Labor still has no plan to address inflation."

But Dr Chalmers rejected such criticisms and said Treasury had "been clear our changes are broadly revenue neutral and won't add to inflation".

He said the income boost would only begin to flow from the middle of the year when inflation was expected to have moderated further, and because it would feed through gradually rather than as a lump sum its effect would be "staggered".

According to the government, any inflationary impact will be offset by a likely increase in workforce participation.

Dr Chalmers said Treasury estimated the tax changes would add about 930,000 hours of work a week, a substantial boost the the labour supply that would help contain wage growth and increases in the cost of services.

"That's the equivalent of 25,000 full-time jobs, which is more than double the labour supply impact of the old stage three," the treasurer said.

He added that because more of the tax cut was being directed to lower and middle-income groups, 5.8 million women salary earners would benefit.

"We'll be delivering a bigger benefit to more than 90 per cent of taxpayers in high demand occupations with a higher percentage of women, including teachers, nurses, aged and disability carers and early childhood educators," Dr Chalmers said.