Stage 3 Tax Cuts: Who Benefits and Why the Contention?
The Coalition Government legislated amendments to personal income tax in the years 2018, 2019, and 2020. Collectively these changes are called the Personal Income Tax Plan. The plan was divided into three stages. The Stage 3 cuts are the third and last stage of the Turnbull and Morrison Government’s policies for tax reform.
The first two stages primarily affected low- and middle-income wage earners. These stages have been realised.
The third phase of the plan, namely the stage 3 tax cuts, is due to become effective in July 2024. They are the notoriously contentious part of the plan as those set to benefit from stage 3 are largely people with high incomes.
The Stage 3 cuts still occupy a predominant space in Australian political discourse, as before the 2019 election the Labor Party pledged to abolish them. Yet, leading up to the 2022 elections, Labor did a double take and guaranteed that they would enforce the already legislated cuts.
Stage 3 Tax Cuts
As of July 2024, Stage 3 tax cuts will be set in motion. In short, these tax cuts will primarily benefit higher-income earners.
Here are some of the actions that form this tax cut plan:
- The top tax bracket currently begins at an income of $180,001. This bracket figure will be increased to $200,001.
- The 37% bracket, previously corresponding to incomes from $120,001 to $180,000, will be removed.
- A new bracket will then come into effect – ranging from $45,001 – $200,000. The tax rate for this new bracket will drop from 32.5% to 30%.
To present this idea in another way, here is an overview of Australia’s current tax brackets:
- up to $18,200 – no tax
- $18,201 to $45,000 – pay tax at a rate of 19%
- $45,001 to $120,000 – pay tax at a rate of 32.5%
- $120,001 to $180,000 – pay tax at a rate of 37%
- $180,001 plus – pay tax at a rate of 45%
Here is what the tax brackets would be like under stage three:
- $18,200 – no tax
- $18,201 to $45,000 – pay tax at a rate of 19%
- $45,001 to $200,000 – pay tax at a rate of 30%
- $200,001 plus – pay tax at a rate of 45%
In short, once the stage 3 tax cuts come into effect, all taxpayers earning anywhere between $45,000 – $200,000 will pay tax at the same 30% rate.
Thus, stage 3 tax cuts will chiefly benefit individuals with high incomes. While taxpayers earning $45,000 or less per year will receive $0 from the cuts, individuals earning $200,000 per year will receive a cut of $9,075.
Why Were the Tax Cut Changes Introduced?
Before the pandemic and the current wars, and before today’s energy, inflation, and supply chain pressures, Australia was in a very different situation.
Back then, the Liberals wanted to attain its ‘back in the black’ budget and sort to encourage economic growth via tax cuts. It also aimed to tackle ‘bracket creep,’ an issue that it had been concerned about as far back as 2015.
In 2019, the treasurer of that period, Josh Frydenberg, informed the Australian parliament: “Securing future tax cuts now will provide confidence to Australians that they will be rewarded for their hard work and it will help protect their future pay increases from bracket creep”.
Today, Australia is presented with a cost-of-living calamity, steeply rising inflation and the threat of a recession. Faced with these conditions it might seem like a reasonable request for Labor to reconsider its stage 3 tax promises.
Labor’s Treasurer Remains Steadfast With Stage 3
Initially, Labor resisted the stage 3 tax cuts. However, after “weighing up a whole range of considerations”, Labor treasury spokesman, Jim Chalmers, now backs the tax initiative. In the face of widespread thought that the Albanese Government may review and reassess the stage 3 cuts, Chalmers appears unfaltering in his resolve to move forward with the cuts.
The treasurer insists there is no change to Labor’s conviction to keep the tax cuts. He notes that the cuts assist with bracket creep, which is wage increases moving taxpayers into higher tax brackets. In other words, the cuts are intended to cushion the impact as taxpayers are met with greater rates of tax as they transition into higher tax groups.
The treasurer addressed the press, the day following May 9, 2023, when he presented the 2023-24 budget. The press asked Chalmers questions about the stage-three income tax cuts, for example, Could the treasurer promise that the tax cuts would not be abolished or modified? Do earners making over $120,000 the largest beneficiaries, need to be appeased because of ‘bracket creep’?
The questions were met with insistence that Labor has not changed its stance on the cuts, which are legislated to be implemented in 2024.
What Are the Disadvantages of the Stage 3 Tax Cuts?
Many experts argue that the stage 3 cuts are the most inequitable and expensive tax cuts to be implemented in Australia. The most recent calculation estimates, conducted by the Parliamentary Budget Office, predict that in the initial 10 years following the execution of the cuts, the federal government will amass $320 billion less tax revenue than it would have otherwise collected.
Other economists predict that in 2024-25, the stage 3 cuts will constitute 58% of the entire budget deficit. Furthermore, each dollar of the expense of the stage 3 tax cuts, is a dollar Australia cannot spend on public services, including Medicare, Jobseeker and Aged Care.
In its initial year, the stage 3 cuts are estimated to cost $21 billion. This figure is greater than the finances the government allocates to the following services:
- Childcare subsidies ($13.4 billion)
- Army capabilities ($11.4 billion)
- Public universities ($11.4 billion)
It is also four times the figure the government allocates to foreign aid.
What Are the Advantages of the Stage 3 Tax Cuts?
Independent economist Chris Richardson notes that objections about the fairness of the tax cuts are exaggerated and fail to recognise the cuts’ role in providing a standard for lower and middle-income tax cuts.
As Mr. Richardson said on social media: “Although stage three does benefit the top 10 per cent, it delivers tax cuts to the top 78 per cent of taxpayers”.
Who Benefits From the Stage 3 Tax Cuts?
Given the stage 3 tax cuts primarily go to higher income earners, the people who benefit greatly from these cuts are people with occupations that attract high average incomes. For example, anesthetists and surgeons receive the maximum cut of $9,075 each year, as these professions have average incomes of over $200,000.
The basic pay for federal parliamentarians is $211,250, meaning all federal parliamentarians receive the maximum cut of $9,075, yearly. CEOs of prominent companies are also beneficiaries of the cuts. The big four banks’ CEOs earn $4.2 million – $ 6.3 million yearly. As such they will all receive a tax cut of $9,075.
Who Loses Out From the Stage 3 Tax Cuts?
Whenever tax cuts are implemented without any balancing legislation, the Australian public as a whole stands to lose out in terms of reduced public expenditure on infrastructure, common goods, government services and national assets.
To Sum Up
As seen, the stage 3 tax cuts are the final part of a three-phased tax reform. Stages one and two, put into effect in 2018 and 2020 respectively, were by and large uncontroversial. The stage 3 cuts are so controversial and continue to feature in Australian political debate because many Australians worry that high-income earners will disproportionately benefit from these cuts in a time of elevated cost of living and an ongoing housing crisis.
Such Australians also feel uncertain about the direction and possible magnitude of the stage 3 tax cuts fearing they might permanently make the Australian tax system less progressive.
However, others hold that Anthony Albanese went to the 2022 election promising no changes to what had been legislated and therefore needs to fulfil his word. Some maintain that stage 3 is a necessary answer to bracket creep.
If you would like help navigating these changes, please refer to our business tax return services page or get in touch with our team today.
