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Submission to the Senate Economics Legislation Committee inquiry into the Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018

Federal government Budget Taxation Income tax Australia
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We welcome the opportunity to comment on the Treasury Laws Amendment (Personal Income Tax Plan) Bill 2018.

The tax cuts proposed by the Personal Income Tax Plan are the largest ever proposed in a Federal Budget. The third tranche of the Tax Plan will ultimately comprise almost half the annual cost of the Tax Plan.

This substantial reduction in revenue is not obviously consistent with the Federal Government’s medium-term fiscal strategy of budget surpluses on average over the economic cycle. On current projections these will be achieved only if Australia experiences a lengthy period of unprecedented economic calm and fiscal restraint.

While fairness is in the eye of the beholder, the Tax Plan should be evaluated relative to the progressivity of the income tax system today. While the level of progressivity is a value choice, changes to such a fundamental issue should be made consciously, in the light of comprehensive analysis of proposed changes.

Without tax cuts, the income tax system will become less progressive. Bracket creep has the biggest effect on the average tax rates of taxfilers in the middle of the distribution (who earn around $44,000 a year).

The Tax Plan does not unwind the reduction in progressivity as a result of bracket creep. The Tax Plan reduces average tax rates by about 1 percentage point for most taxpayers. But it reduces average tax rates by substantially more for the top 20 per cent of taxpayers – except for the top 1 per cent of income earners.

As a result, by 2027-28, about 3 per cent of the tax burden will be shifted from the top 20 per cent of income earners to those lower down.

The outcomes vary a little depending on wages growth. If wages grow more slowly than projected, then the combination of bracket creep and the Tax Plan will be a little less regressive than if wages grow as projected in the budget.

Other analysis is less relevant to fairness. The proportion of the tax cuts over eleven years going to high-income earners distracts from the ongoing impact of the tax cuts after that period. The proportion of taxfilers in the top or second-top tax bracket, or the proportion of tax paid by them, is likewise a distraction because it does not indicate whether the overall system is becoming more or less progressive.

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