Government’s claim its tax cuts target middle Australia is not true

Treasurer Scott Morrison's tax cuts will cost $144 billion over 10 years.

Treasurer Scott Morrison's tax cuts will cost $144 billion over 10 years. Photo: AAP

Over the weekend the Government released figures proving, so it claimed, that its proposed income tax cuts would flow not to the nation’s richest, but to ordinary ‘middle-income’ Australians.

But the claims, made in the form of Treasury figures released exclusively to News Corp and Fairfax, were based on spurious arguments that crumple under scrutiny.

News Corp’s The Weekend Australian splashed the ‘news’ across its front page, pitching it as a vindication of the most controversial element in Treasurer Scott Morrison’s three-stage tax cut package: the scrapping of the 37 per cent bracket.

You can read the article here if you have a subscription.

The casual reader could easily have come away from this article thinking the tax cuts were fair.

But a close reading of the piece reveals the big beneficiaries of the tax cuts are indeed wealthy Australians, not middle-income Australians, and assertions to the contrary are based on a number of dodgy assumptions.

Dodgiest of all is the decision to class as ‘middle income’ anyone earning between $120,000 and $200,000 a year.

The Australian’s account

In the federal budget earlier this month, Treasurer Scott Morrison announced he would be scrapping the 37 per cent tax bracket altogether – a move that would put someone on $41,001 a year in the same tax bracket (32.5 per cent) as someone on $200,000 a year.

This policy was immediately criticised as favouring the wealthy. The Grattan Institute, for example, released modelling that showed the majority of the benefits would go to the wealthiest 20 per cent of Australians.

But on Saturday The Australian claimed the new Treasury modelling showed middle Australia, not high-income Australia, would take the spoils.

It stood this claim up by classifying ‘middle-income earners’ as people earning between $120,000 and $200,000 a year.

As ridiculous as that my sound, The Australian (and, it seems, Treasury) did have a rationale.

Currently the average full-time wage is around $84,600 a year. If wages increase by 3.5 per cent a year – as the modelling assumed they will – then by 2028 the average full-time wage will be $119,337 a year.

In other words if you earn $120,000 a year in 2028 you will be on an ‘average’ income. From this projection alone, The Australian justified classing $120,000 to $200,000 a year as ‘middle income’.

There is so much wrong with this, it’s hard to know where to start.

The numbers

First of all, assuming wages will rise by 3.5 per cent a year is incredibly optimistic. Currently wages are rising by 2.1 per cent. If that continued for the next 10 years, by 2028 the average wage would be just $104,000. If they rose by 3 per cent they’d only be $113,700.

Secondly, ‘full-time average wages’ is a misleadingly high number. If you include part-time workers, the average wage is far lower, at just $1192 a week, or $62,000 a year (check out the ABS data here).

Even with phenomenal wage growth of 3.5 per cent, that would be just $87,500 by 2028.

And if you look at median rather than average wages – a more representative measure – then the difference is even more striking. In the most recent year for which The New Daily could find reliable ATO figures (2015-16), the median annual income was just over $46,000.

Even with 3.5 per cent wage growth every year between then and 2028, the median annual income would be just $63,500 by 2028 – barely half of what The Australian classes as ‘middle income’.

But there’s more

If all that isn’t enough to discredit The Australian’s specious argument,  try this.

Apparently the Treasury’s modelling shows the cost of abolishing the 37 per cent tax bracket would be $33 billion over four years. The cost, meanwhile, of lifting the top tax bracket (45 per cent) from $180,000 to $200,000 would be just $9 billion.

The Australian jumps to the following conclusion: It classes (spuriously, as we’ve established) an income of $120,000 to $200,000 as ‘middle income’. The majority of the losses of stage three of the tax cuts come from putting these ‘middle-income earners’ into a 32.5 per cent tax bracket.

Therefore, it asserts, the benefits of the tax cuts go to middle-income earners, not high-income earners.

This is a majestic pile of nonsense, and here’s why.

If you earn, say, $300,000 a year, you still stand to make huge savings from the abolition of the 37 per cent tax bracket. Why? Because you’re currently paying it.

In 2023-24, someone on $300,000 a year will pay $32.5 per cent on every dollar earned between $41,000 and $120,000, 37 per cent tax on every dollar earned between $120,000 and $180,000, and 45 per cent after that.

But from 2024-25, that same person will pay just 32.5 per cent on every dollar earned between $41,000 and $200,000, and 45 per cent after that.

So the more you earn over $120,000, the more you save from the policy.

In other words, the country’s wealthiest stand to gain much, much more from this tax cut than The Australian’s so-called ‘middle-income earner’ on $120,000 a year.

The conclusion? The Australian’s account is deeply misleading.

Whether Treasury’s interpretation of the figures was also deeply misleading is impossible to say, because Treasury would not give The New Daily access to its modelling, despite repeated requests.

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