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Briefing paper

Cutting income tax: can we add the bacon to the 'hamburger and milkshake' tax cuts?

Taxation Income tax Federal government Budget Tax cuts Australia

The federal government has flagged personal income tax cuts as a feature of the 2018-19 Budget to be tabled on 8 May. The only indication they have given of the form of the cuts is that they will favour low and middle income earners. The timing is also uncertain, as the government has little budgetary room to manoeuvre in the next few years.

The key problems with the current situation are that marginal rates are excessive and — with bracket creep pushing more taxable income into higher rate bands every year — the overall average rate of tax is increasing and projected to reach unprecedented levels in the next decade. These trends are being exacerbated by increases in the Medicare levy. Bracket creep has its most pernicious effects at low and middle incomes.

There has been little change in the bracket thresholds since 2012. A full-time worker on the adult minimum wage will soon be pushed from the 21% marginal rate bracket to the 34.5% bracket. At average weekly earnings, full-time workers are again approaching the second highest marginal rate of 39%. At the top, the $180,000 threshold has remained unchanged for 10 years, during which the proportion of taxpayers falling into the top bracket has more than doubled.

This paper reviews the case for personal income tax cuts; the various forms they could take; and the budgetary scope for cuts. It then suggests what the priorities should be.

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CIS Policy Paper 1