The centrepiece of the budget is an enormous income tax cut over seven years. This is unusual because the budget papers only show the impacts of policy changes over four years. What is also unusual is that the big parts of the tax cuts start in the fifth year, just outside the budget’s forward estimates and therefore the real impacts of these tax cuts are hidden from public view.
This tax cut is a fundamental change to our income tax system. It is not simply an income tax cut; it will move Australia to a flat tax for over 80% of workers.
The jewel in the tax system is the progressive nature of our income tax. It means those who can afford to pay more do so. Moving from a progressive system to a flat tax system means a big tax cut for those at the top and very little for those at the bottom. In fact if this tax cut is implemented in full, then those on low incomes will be paying a bigger share of total income tax and those at the top will be paying a smaller share.
A simple way to look at this is to compare two taxpayers. Someone earning $40,000 per year will get a tax cut of $455 per year while someone earning $200,000 will get a tax cut of $7,225 per year. Some might say that of course someone on $200,000 will get a bigger cut; after all they pay more tax. But while someone on $200,000 earns five times more than someone on $40,000, their tax cut will be 16 times larger.
This is the problem with flattening a progressive tax system. High income earners will get an oversized tax cut, completely out of proportion to their incomes. This shows up clearly when we look at what proportion of the tax cut goes to which group.
At The Australia Institute, we have been analysing the proposed tax cut since the release of the budget to calculate how much of the tax cut will go to high income earners and how much goes to middle and low income earners.