New-look tax plan ‘objectively better’, experts say

The government’s overhauled stage three tax cuts align better with tax design principles and will take pressure off families disproportionately affected by the cost-of-living crisis, experts say.

CreditorWatch CEO Patrick Coghlan was confident that the revised plan would have positive impacts on business and the economy.

“It’s easy to get into the politics of it, but from an objective economic and financial standpoint it will certainly provide confidence back into the market if people have got more money to actually spend,” he said.

“It will take a little bit of pressure off a big chunk of Australians,” he said, creating a “knock-on effect” for the broader economy.

“That more Australians can spend more is obviously good for the economy,” he said.

“Businesses will certainly take positives out of this. Obviously there is going to be a segment of the consumer market at the higher end of the payroll that that will be disappointed, but I think overall, helping those on lower salaries does make sense and businesses in general will benefit.”

However, Mr Coghlan cautioned it was too early to rule out the impact of the tax cuts on inflation. “The only thing that we do worry about is just the potential for what sort of impact this could have on inflation, if any, but it's way too early to be able to know.

The stage three tax cuts as devised by the Coalition in 2018 only gave tax breaks to higher-income earners, collapsing the 32.5 per cent and 37 per cent tax brackets into a single 30 per cent bracket and raising the threshold for the top 45 per cent tax bracket from $180,000 to $200,000.

However, changes announced by the prime minister at the National Press Club in Canberra on Thursday flipped the focus around, cutting the lowest rate of income tax from 19 per cent to 16 per cent and the second tax rate from 32.5 per cent to 30 per cent.

This would also apply for income up to $135,000 to ensure benefits were “fairly and squarely focussed on middle Australia” who needed help with the cost of living. The top tax bracket would be raised from $180,000 to $190,000.

Mark Chapman, director of tax communications at H&R Block, agreed the heavy weighting of the original package towards those on the highest incomes “was difficult to justify in the current economic climate”.

“They are now focused on low and middle-income taxpayers, who were previously not well served by the tax cuts, and who have been suffering from increases in the cost of living and are far more numerous than high-income earners.”

UNSW tax law professor Dale Boccabella said the updated package aligned better with the idea of having a progressive income tax system.

“A progressive income tax is a key part of our society to have a redistribution effect. The Morrison cuts had a flat 30 per cent rate over a massive income band – that there is not my idea of progressivity.”

While higher-income earners would be receiving less compared to the original stage 3 cuts, Mr Boccabella said the difference was being overstated.

“The high-income earners are essentially going to lose about 45 per cent of their Morrison tax break. It's not 50 per cent, as some commentators have said, because they are still getting the benefit of the lower rates down the bottom end as well. But it's an equity measure as well that people with more capacity to pay should pay a little bit more than the ones who have less capacity to pay.”

He said the rejigged plan would “change the equation” for the better when it came to tax planning.

“As soon as there’s a lowering of the tax rate at the low end, the equations will change from the Morrison tax schedule," he said.

“People who use a discretionary trust will have a bit more of a break with a 16 per cent rate up to $45,000 and then 30 per cent up to $135,000."

The retention of five income tax brackets would also help the government target relief better, despite concerns of bracket creep, he said. “One of the of the arguments for the 30 per cent long band under Morrison was to deal with bracket creep, but you can deal with bracket creep, as well as retain some progressivity in your income tax.”

“If you're very serious about addressing bracket creep, you need a real good discussion about what our benchmark income tax scale looks like. And then you index the scales.”

But the political backlash caused by the changes may make the government “think twice” about further reforms to the tax system.

“The strength of the backlash here on the politics of it will be an indicator to how the Labor party progress with having a broad, mature conversation about tax reform," he said.