Labor turns Coalition's tax trap on its head

The changes to the stage three tax cuts announced by Labor will deliver an extra $84 billion to low- and middle-income earners over the next 10 years and double the tax cuts for Australians on the average income.

The changes are not only better for 85 per cent of taxpayers and for the Australian economy long term, they are now a political wedge for the Coalition.

Two weeks ago, the stage three tax cuts were a revenue time-bomb and political trap set for Labor by the previous Coalition government.

Labor couldn't change the tax cuts without being accused of breaking an election promise; and if they stuck to Morrison's stage three tax cuts, Labor would be responsible for not only permanently making Australia's progressive income tax system flatter by removing the 37 per cent tax bracket, but they'd be delivering tax relief that would overwhelmingly benefit the top 10 per cent of income earners during a cost-of-living crisis while delivering nothing for people on the minimum wage.

Now, Anthony Albanese and Jim Chalmers have turned the Coalition's trap for Labor into a wedge for the Coalition. The big question now for the Coalition is will they support or oppose the modified cuts?

Labor's better and fairer package will see a bigger tax cut for 11 million low- and middle-income taxpayers, and, at the same time, a smaller tax cut for 1.8 million high income taxpayers than they would have under the original stage three plan. Sir Humphrey Appleby from Yes Minister might describe voting against such a change as a "courageous decision".

Around 2.8 million taxpayers (or roughly equivalent to the population of Western Australia) will get a tax cut under the modified stage three who would have received nothing under Morrison's package. Zip. Nada. Zilch. These are low-income earners, earning between $18,200 and $45,000 per year who will now be up to $800 better off.

All taxpayers earning between $45,000 and $135,000 will receive an additional $804 a year, and that's on top of what they would have originally received.

It's important to remember high income earners will still get a large tax cut, but it will be slightly less than under the Morrison plan. Someone earning $200,000 per year will no longer get an eye-watering $9075 per year but will still receive $4529 a year. Nothing to whinge about.

Having shrilly defended Morrison's stage three tax cuts to the death, it took the Coalition less than a day to start walking back Deputy Opposition Leader Sussan Ley's comments that the Coalition would repeal Labor's changes. So much for promises.

Now the Coalition is suggesting they will support Labor's changes, as long as the original tax cuts for high income earners remain in place, increasing the cost of the package by about a third.

So, the next time the Coalition tells you they care about inflation or the Budget deficit you can safely laugh at them.

Speaking at the National Press Club, Executive Director of the Australia Institute Dr Richard Denniss also pointed out the political difficulty facing the National Party on the revamped stage three:

"The National Party represent the lowest income electorates in the country. We've had National Party MPs out saying that $190,000 isn't a lot of money ... I'd encourage MPs to have a look at something called the census because they tell you there aren't a lot of people in most National Party seats earning anything like $190,000".

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The regional and rural electorates held by the Nationals will be among the biggest winners out of Labor's new tax package, receiving among the least benefit from Morrison's original tax package.

But frankly it's hard to find any working people who won't be better off. Compared to the original stage three tax cuts, more of the new tax cut will go to women and young people. The share of the tax cut going to women rises from 34 per cent under the original plan to 40 per cent.

While the share of the tax cuts going to people under 35 increases from 21 per cent cut to 28 per cent under Labor's modified tax cut. That represents an additional $1.1 billion.

Over the past five years, the Australia Institute's research has demonstrated why the stage three tax cuts needed to be scrapped or redesigned. Labor's changes don't go as far as the four alternatives the Australia Institute proposed, and there's still room for improvement, but it's a hell of a lot better for most Australians.

Tax is good - it's no coincidence that the highest taxing countries are the happiest in the world. Australia is a low tax country with no carbon tax, limited wealth taxes and perhaps the world's worst designed resource rent tax - the PRRT; we are well overdue for a broader tax reform debate.

Morrison's stage three tax cuts were not only massively unfair and massively expensive, but they would also have permanently entrenched inequality by removing a whole tax bracket.

The fact that as you earn more, you contribute a bigger proportion of your income in tax is a design feature - not a design flaw - of Australia's progressive income tax system. It would be extremely politically difficult for any future government to advocate reintroducing the 37 per cent tax bracket once it had been abolished. Labor has done Australia an enormous public service by preserving it.

Hopefully Labor's decision to redesign the stage three tax cuts to deliver more for middle Australians is the start of a more mature political debate where sensible policy change is expected, rather than 'ruled out' prior to every election.

It would certainly make for a more interesting and genuine democratic conversation about the kind of country we want to be.