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Warning tax cuts could spike inflation: Who should get $3.6b relief?

The RBA's attack on rising inflation has hurt most Aussies finances. Would the Stage Three tax cuts undermine inflation-cutting policy.

Anthony Albanese has poured further fuel on speculation his party is set to wind back tax breaks for high-income Australians, in a move some say would be an unforgivable broken election promise and others tout as a sensible pivot to address the cost-of-living crisis.

The federal government has widely rolled out the line that “we haven’t changed our position” on stage three tax cuts (the treasurer’s office saying as much to Yahoo Finance) after reports the prime minister planned to slash the amount of tax relief given to Australians earning more than $180,000.

The tax clawed back by not increasing the marginal tax bracket threshold to $200,000 has been calculated to save $3.6 billion a year, which could be redistributed to “middle Australia”. How? Well, that’s the question on everyone’s lips and what Albanese is believed to be discussing today in crisis meetings with the Labor caucus.

Tax-focused cartoon hand with dollar coins falling through on the background of an Australian Taxation Office form.
Tax cuts agreed to by Anthony Albanese may be axed after a push to support Australians most impacted by the cost-of-living crisis. (Source: Yahoo Finance Australia)

He stopped short of saying he would not make any changes in his only media appearance of the day, instead stating: “I support tax cuts and everyone will be getting a tax cut.”

It appears to be a double-edged sword for Albanese, who has been told he’s not doing enough to help with ballooning costs, and would also face severe backlash for the “mother of all broken promises” by backing down on the - admittedly contentious - reforms pushed through (with his support) by the Morrison government.

So, what are the pros and cons, and will you benefit from a change to the tax reforms?

Why stage three tax cuts should be be axed: The argument against

The tax reforms have been criticised on several fronts. The basics are:

  • They don’t give money to those who need it most

  • They impact a very small portion of the population, and could benefit 80 per cent of the population if they targeted those earning between $45,000 and $124,600

  • There are bigger fish to fry with that money, like raising welfare, housing support

The tax reforms, as they are, have been savaged for not helping those most in need, not supporting 80 per cent of Australians, and because they have the potential to “turbocharge inflation” - which is what the Reserve Bank (RBA) has been trying to drive down with aggressive interest hikes.

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“People earning between $50,000 and $100,000 will be the worst off under these tax cuts for the rich,” Greens acting leader Senator Mehreen Faruqi said. “They will see very little from stage 3, and will see their mortgages go up when the tax cuts make inflation harder to control.”

Crossbench senators David Pocock and Jaqui Lambie have called for reforms.

Remember when a lot of Australians were seeing much higher tax bills last year? That’s because the $1,500 low and middle income tax offset (LMITO) was scrapped. It was the relief targeted at lower-earning Aussies in the staged tax plan.

Some have argued the stage three cuts don’t need to be completely scrapped, but simply changed, given the economic situation they were conceived in is quite different today.

Why stage three tax cuts should go ahead: The argument for

There is the ‘because he said he would’ argument, and that’s true. Albanese did promise to keep the tax cuts ahead of the election and breaking that promise could be considered a reflection of his character. It’s not completely unheard of though, John Howard famously vowed there’d be “no new taxes” before the GST was introduced.

Outside that very politicised debate, the Liberal Party have said the policy planned for a future where more Australians would be earning higher wages, and those workers should be rewarded, not punished, for their success.

Shadow treasurer Angus Taylor said more than a million households were expected to be in the top tax bracket by 2030, according to estimates.

“Aspiration drives our economy and these tax cuts were all about rewarding hard-working, aspirational Australians, who don’t just benefit themselves when they go hard,” Taylor said. “They invest, they take risks … They benefit others by building businesses, creating jobs and so on. That’s what we need. That’s how you beat inflation.”

How much money are we fighting over and will I get any?

At this stage, the only clear proposal is to keep the marginal tax rate capped at $180,000, which means those earning more would get a tax break of about $9,075.

Those earning less could be primed to benefit from increasing the income-free tax threshold but, until we know the numbers, it’s difficult to crunch.

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Yahoo Australia