Introduction
The Government’s decision to revamp the Stage 3 tax cuts has stirred up a hornet’s nest. The move to reduce the size of the benefits for higher income earners (with those on $200,000 or more getting $4546 a year less) and redistribute them to lower and middle-income earners (with those earning between $50,000 and $130,000 now getting $804 a year more) in order to provide cost of living relief is something that’s easy to understand.
The arguments against it though are a bit more esoteric.
• First, is the politics around committing in the last election and until recently to proceed with the tax cuts as legislated (despite cost of living issues long being well known) only to then break the commitment.
• Second, is the concern that the move treats the symptoms and not the causes of high inflation and risks backfiring. This is because by skewing them to low- and middle-income earners who consume a higher proportion of their income runs the risk that it will add to demand and hence inflation. This risks delaying interest rate cuts.
• Finally, is the argument that it’s yet another backward step in terms of tax reform. This is critical as in recent years Australia’s productivity performance has deteriorated. This has driven a slump in growth in per capita GDP which means lower than otherwise living standards.