Politics Analysis

The tax cut promise that must now be broken

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The pressure is on for Anthony Albanese to repeal the proposed tax cuts to benefit the wealthy (Image by Dan Jensen)

Despite a potential backlash by the Murdoch press, the time is right for Labor to repeal the planned Stage 3 tax cuts, writes Professor John Quiggin.

AMONG THE MANY compromises Anthony Albanese’s Labor Party made as part of its campaign for office, the biggest was the decision to vote for the L-NP’s Stage 3 tax cuts and the promise to implement those cuts once in office. 

The Stage 3 tax cuts were legislated in 2018 and designed by then-Treasurer Scott Morrison. They have all the hallmarks of a Morrison political stunt. The first two stages, benefitting mostly middle-income earners, were designed to sweeten the pill of the third and biggest, which flows almost entirely to those on high incomes.

The stage three tax cuts would abolish the 37% tax bracket, while the 32.5% rate would be cut to 30% for all incomes between $45,000 and $200,000. The vast bulk of the benefit would go to those on incomes above $60 000, with around half going to those on incomes above $180 000.

The unfairness of the cuts is only part of the problem. The loss of revenue (up to $250 billion over the next ten years), when combined with the Government’s stated goal of “budget repair”, is so great as to rule out any significant spending initiative. But more public spending is urgently needed.

The Government faces financial challenges across the board, which threaten to undermine the key achieves of Labor governments going back to Whitlam: including expanded access to university education, Medicare and the NDIS. All of this was designed when Scott Morrison and Malcolm Turnbull proposed a ten-year schedule of tax cuts — the aim was precisely to starve the public sector of the revenue needed to deliver services.

The bulk billing system is on the verge of collapse and for most people outside the system, the gap fee now exceeds the Medicare rebate. Any serious solution must include an increase in the rebate for most services. That could, in principle, be financed by an increase in the Medicare levy. The effect would be to raise taxes for everyone except high-income earners, for whom the higher levy would be more than offset by the tax cuts.

What is the alternative? The strategy put forward by Labor loyalists is that over the course of its first term, the Government can build up support for a more progressive tax system and secure re-election with an increased majority. This sounds good if you say it quickly enough, but falls to pieces once you think about it.

The first full year of the tax cuts is 2024-25, which is also the year in which the next election is due. So, the strategy requires that Labor should campaign for the reversal of the cuts, even as it is in the process of implementing them. 

Even supposing the Government could pull off the necessary acrobatics, there’s no guarantee that Labor is going to do better next time than in 2022. Support for the Green remains strong and is likely to increase if Labor fails to deliver on health and education. And, while the Opposition is in a mess right now, three years is a long time. Opposition Leader Peter Dutton could learn on the job, or be replaced by someone more effective.

If Labor is going to break out of the trap of regressive tax cuts, the time to do it is now, or rather, in the October Budget. The upsurge in inflation means that, unless the tax scales are adjusted, low and middle-income earners will face higher taxes through bracket creep. That’s on top of the expiry of the Low and Middle Income Earners Tax Offset, another of the time bombs left behind by Morrison.

Politically, there won’t be a better time. The Opposition is chaotic and ineffective, and Scott Morrison’s record in office is a gift that keeps on giving. L-NP scandals at the state level, particularly in NSW, would further undermine the effectiveness of any critique based on integrity.

Even given favourable circumstances, dropping the promised tax cuts would incur political costs. The direct effects, from voters whose support depended on the promised tax cuts, would probably be honest. Not that many high-income earners vote Labor and many of those who do are not motivated by financial benefits. Still, it would strengthen the position of “teal” Independents, who could present it as evidence of the duplicity of the major parties.

Against this, Labor would gain support from tax relief for low and middle-income earners, and from spending programs that could be introduced, or not cut, with the revenue saved by forgoing the tax cuts. This would probably more than cancel out any direct loss of votes from dropping cuts.

What matters more is the reaction of the political class and particularly the mainstream media. The Murdoch media would be furious, but that doesn’t matter much, given its reflexive opposition to everything Labor does. The big question is whether supposedly centrist media, most notable the Nine papers and the ABC, focus on the easy gotcha of broken promises or on the fact that these promises should never have been made.

John Quiggin is Professor of Economics at the University of Queensland. His latest book, Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly, is out now from Princeton University Press. You can follow John on Twitter @JohnQuiggin.

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