One thing to be said in favour of Scott Morrison’s complex three-step, seven-year tax plan is that his small tax cuts for the deserving middle income-earners are more likely to actually happen than the huge tax cuts for the undeserving high income-earners.
For the latter to eventuate, Malcolm Turnbull will have to be re-elected at least twice before July 2024. By contrast, the smaller cuts will start in six weeks’ time. For once it’s the rich who’re being promised pie in the sky (hopefully) before they die.
This means it’s wrong to simply compare the $530-a-year saving for people on middle incomes with the $7225-a-year saving for all of us struggling to get by on more than $200,000 a year.
Why? Because by the time the people on such big incomes are due to get their tax cut, the others will already have had their much smaller cuts every year for six years.
The thing about money is that the sooner you get your hands on it, the better. Economists call this “the time-value of money”.
But that about exhausts the good points of ScoMo’s tax plan. His claim that it would make income tax “lower, simpler and fairer” is debatable.
Even his claim that the first step in his cuts is aimed a “low and middle income-earners” is misleading. People accept such claims only because they have no idea where the middle is.
ScoMo wants to overstate the level at which the middle is situated because his tax cuts are designed to favour the better-off.
He quotes the average weekly earnings of full-time employees – about $85,000 a year – as his indicator of the middle. But way more than half of full-time workers earn less than this.
That’s because the super-high salaries of a relative handful of employees push up the arithmetic average (the mean), making it a misleading measure of “central tendency”.
No, the better measure is the median – the income that’s higher than half the other incomes and lower than half the others. That is, the one dead in the middle. A high proportion of all full-timers will be clustered in roughly equal proportions a bit above and below the median.
The median income of adult full-time employees is about $76,000 – almost 11 per cent lower than the mean. But this measure ignores almost a third of workers who are part-time. Don’t they pay tax?
The median income of all employees is about $57,000 – which is a much better indicator of “the middle of the middle”.
ScoMo’s full tax saving of $530 a year (about $10 a week) will go to the 4.4 million taxpayers earning between $48,000 and $90,000 a year. That range goes from 16 per cent below the all-employees median to 58 per cent above it. Touch of asymmetry there. But there’s more.
On the upside, the 1.5 million taxpayers earning between $90,000 and $125,000 get a saving that starts at $530 and slowly reduces until it reaches zero at the top of this bracket.
On the downside, the 1.8 million taxpayers earning between $37,000 and $48,000 a year get a saving of $530 at the top, which then falls to $200 at the bottom of the bracket, while the 2.4 million taxpayers earning between $18,000-odd and $37,000 get nothing at the bottom, rising to $200 at the top.
Now, what would be a good indicator of a low income? Well, the minimum full-time wage is about $36,000 - meaning these people get a saving of about $185 a year or $3.60 a week. Wow. That much?
And what about all the under-employed workers who can’t get as many hours as they need. Aren’t they low income-earners? Their saving could be as little as zilch.
Still think ScoMo’s first step is aimed at “low and middle income-earners”? The truth is it’s aimed at middle and upper-middle earners. Anyone well below the middle gets peanuts.
Morrison’s claim that his plan would make income tax simpler is based on his second and third steps, in July 2022 and July 2024, finally eliminating the 37¢-in-the-dollar bracket, reducing the rate scale from five brackets to four.
But his changes would make the system more complex by introducing a new “low and middle-income tax offset”, to go on top of the existing low-income tax offset.
The effect of both offsets could have been incorporated into the rate scale, but hasn’t been. Why not? Because leaving them separate stops people seeing the extra tax rate (1½¢ in the dollar) they pay as their eligibility for the tax offset is clawed back to zero.
The Australian Taxpayers Alliance has demonstrated that, far from reducing the tax scale from five brackets to four, in truth the plan increases them from eight to 10. That’s simpler?
Our income tax is “progressive” because successive slices of your income are taxed at progressively higher rates. It would stay progressive under ScoMo’s plan, because it would still go from a first bracket where the tax rate is zero, to a top bracket where the rate is 45¢ in the dollar.
But it would, in a sense, be less progressive in that, after step three, almost three-quarters of taxpayers would end up in a huge bracket running from $41,000 to $200,000, all with a “marginal” tax rate of 32.5¢ on the last part of their income.
A better way to put it, however, is that ScoMo wants to put a big kink in the progressive scale. As your income rose above $200,000, your marginal tax rate would suddenly leap from 32.5¢ to 45¢.
Why is every country’s income tax scale progressive? Because making people contribute a higher proportion of their income according to their “ability to pay” is considered fairer.
When Morrison claims his changes would make the system fairer, he’s turning the meaning of the word on its head. He thinks the system would be fairer if high income-earners had to pay a smaller proportion of their incomes in tax.
