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Will tax cuts save the Turnbull Government?

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Treasurer Scott Morrison - somewhat clueless when it comes to middle Australia (Image via Wikimedia Commons)

The Turnbull Government has patted itself on the back for its income tax package, but Michael Keating explores why this has done nothing to sway the public vote.

LAST WEEK, the Turnbull Government got its personal income tax package through the Parliament.

The Government estimates that these tax cuts will cost the Budget $144 billion over the next decade. The Government has not, however, provided us with convincing evidence that the nation can afford this generosity and how it proposes to pay for these cuts, while still returning the budget to a sustainable surplus.

But no worries. According to the Government, there is no need for the public to reason why and how these tax cuts are reasonable. Instead, the Government celebrated its legislative victory, urged on by its usual media cheer squad. Yes, we were invited to think that all the Government’s troubles were over now that it has achieved passage of its personal income tax policies, with just the company tax cut for very big companies remaining to be passed.

As the saying goes, however, a week is a long time in politics; or even a weekend in this case. Less than a week after the tax cuts were legislated, Fairfax Media released its opinion poll, taken just after that event, and reported that no votes had changed in response to the promised tax cuts. As far as the Press Gallery is concerned, the critical question is why have no votes changed and why is the Government still behind in the polls?

Unfortunately, the Press Gallery has long since lost any capacity for real analysis of the issues and focuses only on the politics. Accordingly, the Gallery came up with its usual answer. The electorate is unmoved by these tax cuts because they don’t trust the Government – or any other politicians – to deliver on their promises.

The Gallery loves this sort of explanation as it allows them to pontificate in terms of a plague on all political parties, without ever appearing partisan. However, the consequent damage to our body politic is such that people have been cynical about political promises for 40 years or more. Furthermore, I don’t think this most recent Gallery analysis provides any reason for thinking the public would be more cynical about these latest tax cuts than any other such promises that have been made in the past (although they certainly should be — see my article, ‘How Useful and Reliable are the Budget Projections’, posted on Pearls & Irritations, 29 May 2018).

Instead, in my view, the most probable reason why these tax cuts are not leading the public to switch their votes in favour of the Government is that most people are smart enough to realise that they will gain next to nothing from this tax package. Indeed, the only surprising thing is that the Gallery itself cannot see that and write it up.

The reality is that even when fully phased in, by 2025, these tax cuts amount to only $10 per week for anyone with a taxable income up to as much as $70,000 a year (Table 1). Even a taxpayer with a taxable income as high as $90,000 a year will still only get a tax cut equivalent to $13 per week. On the other hand, those taxpayers with taxable incomes of $120,000 per year and $200,000 per year will get a cut equivalent to nearly $40 per week and $140 per week respectively.

Table 1: The Government’s income tax cuts ($)

Source: Treasury as cited in James Fernyhough, ‘This is how the biggest tax cut in history will affect you’.

In addition, while the Treasurer likes to talk about middle-Australia by referring to people with incomes of $90,000 or even a bit more, the reality is that the average wage (allowing for the fact that almost one third of workers work part-time) is $62,000 a year, the median wage is just over $55,000 per year, and the median tax-filer’s income is just under $45,000 a year. In other words, half the workers in Australia are only earning 60 per cent of what Scott Morrison likes to think of as "middle Australia" and the average taxpayer has an income which is only half that of Scott Morrison’s dream for middle Australia. In short, Australia’s middle-income earners have incomes much less than Scott Morrison claims and much less than the people who are the real beneficiaries of his tax cuts.

Thus, for almost all taxpayers, the Government’s personal income tax cuts are almost insignificant, but for a few wealthy people, these tax cuts are very significant. But the people whom the Government is trying to con are smart enough to know what their personal income is and this means that they can work it out that they will not gain anything significant from this tax package.

It should, therefore, be no real surprise that most people presently inclined to vote Labor will not be persuaded by these small reductions in their tax to change their vote in favour of the Coalition. Indeed, most undecided voters may well be persuaded that they would gain more from Labor’s proposed tax changes, which will arrive sooner and are much more affordable.

This article was written by Michael Keating and originally published on 'Pearls and Irritations'Michael Keating is a former Head of the Department of Prime Minister and Cabinet.

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