By RMIT ABC Fact Check
The issue of income tax — and who will pay what and when — has been a prominent feature of the election campaign.
The Coalition says Labor’s promise not to go ahead with the second and third stages of its tax plan will cost taxpayers $230 billion over the next decade.
Labor says the final two tranches of the plan represent “fiscally reckless income tax cuts for the top end of town”, requiring voters to re-elect a Coalition government twice to see them come to fruition.
In a testy exchange during the May 3 leaders’ debate, Opposition Leader Bill Shorten claimed that, over a decade, $77 billion of the Government’s tax package would go to people earning more than $180,000 a year.
“Seventy-seven billion dollars to the top three per cent of earners,” Mr Shorten said. “That’s nice money if you can get it.”
Prime Minister Scott Morrison countered that he did not accept the figures, as they were sourced from a report by progressive think-tank The Australia Institute.
So, is it correct that over ten years $77 billion of the Government’s tax package will go to taxpayers earning more than $180,000 a year?
RMIT ABC Fact Check investigates.
Mr Shorten’s claim is justifiable.
The $77 billion figure he cites is an underestimate according to two leading tax and economic modellers consulted by Fact Check.
Their analyses, using tax and welfare models similar to Treasury’s, found that, over a decade, taxpayers earning more than $180,000 a year would receive between $88 billion and $89 billion under the Coalition’s tax plan.
Both experts confirmed that the Coalition’s tax measures would reduce the progressivity of the tax system.
According to the Grattan Institute’s Danielle Wood, the share of tax paid by the top 20 per cent of income earners would fall from 68 per cent to 65 per cent under the Coalition’s proposal, while the share of tax paid by middle income earners would rise.
As with all economic models, the results depend on various assumptions and forecasts. Fact Check acknowledges that the figures cited in this Fact Check are forecasts only.
Labor has not ruled out adjusting tax rates or thresholds over time to suit future economic and budget conditions. In a similar vein, there are no guarantees that a re-elected Morrison Government would be able pass the measures in the Parliament as proposed.
As Associate Professor Ben Phillips, from the ANU’s Centre for Social Research and Methods put it: “Tax analysis over a long period such as to 2029-30 on the assumption that tax thresholds and rates will not be altered by future governments makes little sense.”
The Australia Institute’s analysis upon which Mr Shorten’s claim was based left the benchmark for “high earners” — $180,000 — fixed over ten years.
In reality, workers wages will rise over time with inflation, such that in 10 years time, people earning $180,000 may not be considered “high earners”.
Taking into consideration these important caveats, it is self evident that critical elements of the Coalition’s tax plan, including lifting the top tax bracket from $180,000 to $200,000 and abolishing the 37 per cent tax bracket, would, if implemented, be of significant benefit to taxpayers on higher incomes.
Background to the claim
As noted, Labor’s claim that $77 billion of the Government’s tax package would flow to workers earning more than $180,000 is sourced from an analysis by the Australia Institute.
It found that the Government’s tax proposal would make the tax system less “progressive”, such that high income earners would shoulder a smaller share of the tax burden than they do now.
“A substantial proportion of the income tax cut will go to those in the top income tax bracket,” the report says.
“Those earning more than $180,000 will get at least $77 billion in tax cuts over the next 10 years.
“The top income tax bracket will increase in 2024-25 to apply only to those earning more than $200,000.
“Those earning more than $200,000 will get at least $64 billion in tax cuts over the next 10 years.”
The Coalition has several times dismissed the findings on the grounds that the Australia Institute is a “left leaning” think-tank aligned with Labor and unions.
Treasurer Josh Frydenberg this week declined during an interview on Sky News to put a figure on the value of tax cuts going to those earning more than $180,000.
“The only people who put a figure on it are the Australia Institute, and that is a Labor-aligned institute,” he said. “This is not an organisation that we take credibly.”
The Government’s tax package
The Coalition’s tax plan, as detailed in the 2019 Federal Budget, involves three stages. Among other things:
- The low and middle income tax offset (LMITO) would be lifted so that everyone earning less than $126,000 a year would get a tax reduction in this year’s tax return (2018-19), and then another one for each of the following three years;
- From 2022-23, the income thresholds for the 19 per cent and 32.5 per cent tax brackets would be lifted;
- From 2024-25, the 32.5 per cent would be lowered to 30 per cent, and the 37 per cent tax bracket would be scrapped.
The changes would lead to a significant “flattening” of the tax system, under which all taxpayers earning between $45,000 and $200,000 would face the same 30 per cent top rate from July 1, 2024.
“At maturity (in 2024), the new, simpler tax system will have only three tax rates and will ensure that a projected 94 per cent of taxpayers will face a marginal tax rate of no higher than 30 per cent,” the Budget said.
Labor’s tax plan
Under Labor’s plan, as the Grattan Institute explains in an article published on The Conversation, low income workers earning less than $48,000 a year would get a larger offset than under the Coalition plan; those earning more than $48,000 would get the same offset as those under $48,000 or as under the Coalition plan, although on an ongoing basis rather than over four years.
From July 1, 2019, Labor would increase the top marginal tax rate paid (for those earning more than $180,000 a year) from 45 per cent to 47 per cent (or from 47 per to 49 per cent including the Medicare levy) until 2022-23.
Labor has also promised it will not proceed with stages two and three of the Coalition’s tax plan, from 2022-23 and 2024-25.
As Labor puts it in its tax policy document on its website:
“Labor will not proceed with the Morrison Government’s fiscally reckless income tax cuts for the top end of town. Voters would have to elect a Morrison Government twice to see them come to fruition — it’s ridiculous.
“Independent Parliamentary Budget Office analysis shows that the fiscal impact of the Morrison Government’s stage two and three tax cuts is an astonishing $286 billion over the medium-term, coming at an annual cost of nearly $50 billion by the end of the decade.”
According to the Grattan Institute, the Coalition plan would cost the budget $298 billion over the next decade, while Labor’s plan would cost about $63 billion.
In a press release, Treasurer Josh Frydenberg said Labor’s tax policy would deny taxpayers $230 billion over 10 years.
Testing the claim
As the Government has declined to put a figure on the value of tax relief going to those earning more than $180,000, RMIT ABC Fact asked two leading tax modelling experts to each examine the question.
That analysis was undertaken by the Grattan Institute, and the Australian National University’s Centre for Social Research and Methods.
Both organisations came to similar conclusions.
What the Grattan Institute model found
The Grattan Institute’s model, known as Grattax, suggested the Australia Institute was being conservative in its estimates.
It concluded the total value of tax cuts going to taxpayers with taxable incomes of more than $180,000 was $89 billion over 10 years.
The findings are summarised in the following graph.
Benefit for taxpayers earning over $180,000 ($b)
For those in the top tax bracket (which rises from $180,000 to $200,000 in 2024 under the Coalition’s policy), the benefit was estimated at $73 billion.
The Institute’s Program Director, Budget Policy and Institutional Reform, Danielle Wood, said the finding that those earning more than $180,000 are major beneficiaries of the Coalition’s tax cut plan was not surprising.
“Most tax cuts benefit those on high incomes the most because they receive the benefit of lower taxes across more of their income,” Ms Wood said.
“Of course they pay more tax too.”
Ms Wood said the Coalition’s tax proposal would reduce the progressivity of the tax system, something it should be open about.
“Once fully rolled out, it is clear the tax plan will somewhat reduce progressivity,” she said.
“The share of tax paid by the top 20 per cent of income earners will fall from 68 per cent to 65 per cent and the share of tax paid by middle income earners will rise.
“This is a shift in the relative tax burden and I think the Government should be upfront about that.”
What the Centre for Social Research and Methods found
The ANU’s Centre for Social Research and Methods estimated that taxpayers earning more than $180,000 a year would get $88 billion out of a total of $300 billion under the Coalition’s tax plan.
The centre’s principal research fellow, Associate Professor Ben Phillips, said although he had “no major issue” with the Australia Institute’s figures, he “would suggest the analysis itself is not a particularly useful characterisation of the tax policies of the two major parties”.
Professor Phillips pointed out that the Coalition had outlined a seven-year plan for tax that more than compensated for bracket creep.
(Bracket creep is where taxpayers are pushed into higher tax brackets by rising wages.)
“The Labor plan is more short term and does not attempt to compensate for bracket creep over the longer term and provides no guidance on where tax rates and brackets should be in the future,” he said.
“The Labor approach is the more traditional approach. Governments in the past usually considered tax changes over the shorter term so as to better take into account prevailing economic conditions.”
Professor Phillips said if the budget papers were correct and wages growth returned to historic rates (of 3.5 per cent a year), then the Coalition’s plan would make sense.
“However, if wage rates continue to remain subdued then the Coalition may have tax revenue problems, depending what else happens in the economy.
“In short, tax analysis over a long period such as to 2029-30 on the assumption that tax thresholds and rates will not be altered by future governments makes little sense.”
“Naturally, high income earners pay the largest share of personal income tax, so attempts to offset bracket creep will naturally suggest that high income earners receive a larger ‘tax cut’.
“In reality, it just requires more dollars returned to high income earners to offset the impact of bracket creep.”
Principal researcher: Josh Gordon, economics and finance editor