The Coalition's income tax cuts will help the rich more, but in a decade everyone pays more anyway
- Written by Ben Phillips, Associate Professor, Centre for Social Research and Methods, Australian National University
Does the Coalition’s tax plan favour high earners over those with lower incomes?
Depending whom you listen to, the tax cuts, unveiled in last month’s federal budget, lead to either a flatter, more regressive tax system under which low-income earners will be even worse off relative to high earners, or the opposite, with a progressive outcome. It can’t be both.
Read more: Most of the benefits from the budget tax cuts will help the rich get richer
While there are tax cuts proposed from July this year, the most substantial cuts are planned for 2022-23 and then 2024-25. As this is several years away, it becomes tricky to analyse their likely impact.
The main issue is wage inflation, which in turn leads to “bracket creep”. We tend to think about the change in terms of what it means for today’s incomes, but that’s not realistic. An annual income today of A$80,000 will be around A$110,000 by 2027-28 if the government’s wage projections prove to be accurate.
Using our model of the Australian tax and welfare system, PolicyMod, we projected the incomes of each person in the 20,000 families in the underlying model survey data (the Australian Bureau of Statistics’ Survey of Income and Housing 2015-16).
We did this for each year until 2028-29, using the federal budget’s wage assumptions. We then used this to forecast the outcome of the proposed tax cuts, and compared it with the effects of maintaining current tax rates.
Our results are remarkably similar to the forecasts of Treasurer Scott Morrison. He has projected a total tax cut between 2018-19 and 2028-29 of A$143 billion, whereas our model puts this figure at A$140 billion.
Whose tax is being cut?
Who will actually receive these tax cuts, and will they really benefit? Our modelling shows around 50% of the adult population pays income tax in a given year. So clearly the benefit goes to the top half of the taxable income distribution.
What’s more, if the tax cuts are only returning bracket creep for many taxpayers, then they are not really tax “benefits”, because they will not make those people better off in real terms.
This is clearly shown in the chart below, where the bottom 50% of taxable income individuals will have a negligible share of tax savings. Around 33% of total savings between 2018-19 and 2028-29 go to people in the top 5% of incomes. In 2028-29 it is 38%.
- ^ federal budget (theconversation.com)
- ^ regressive tax system (www.theguardian.com)
- ^ progressive outcome (www.afr.com)
- ^ Most of the benefits from the budget tax cuts will help the rich get richer (theconversation.com)
- ^ bracket creep (theconversation.com)
- ^ PolicyMod (csrm.cass.anu.edu.au)
- ^ Survey of Income and Housing 2015-16 (www.abs.gov.au)
- ^ earlier analysis (csrm.cass.anu.edu.au)
Authors: Ben Phillips, Associate Professor, Centre for Social Research and Methods, Australian National University
Read more http://theconversation.com/the-coalitions-income-tax-cuts-will-help-the-rich-more-but-in-a-decade-everyone-pays-more-anyway-97539