Home Essential support Removing Stage 3 tax cuts is essential, but won’t be easy

Removing Stage 3 tax cuts is essential, but won’t be easy

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Repealing the Stage 3 tax cuts will not be an easy task, presenting Anthony Albanese with a unique set of challenges, writes Professor John Quiggin.

AMONG THE MANY quirks of the Westminster system of government are tradition that a newly elected Speaker of the Lower House must be dragged to the Presidency with a show of reluctance. The tradition dates back to when the Speaker had to present the views of the House to a King who could have them arbitrarily arrested and executed. Seven orators were indeed beheaded between 1394 and 1535.

A similar situation is emerging with the Phase 3 tax cuts. These cuts were legislated in 2018, as part of a three-stage program devised by then-Treasurer Scott Morrison. The first two stages were relatively modest sweeteners, aimed at low- and middle-income people. Stage 3, which was to take effect in 2024-25, involved a massive drop in the top income marginal tax rate, from 37% to 30% for incomes between $90,000 and $200,000.

Labor initially opposed Stage 3. However, after the 2019 election defeat and unwilling to reject the modest benefits for middle-income earners incorporated into the package, Labor capitulated and voted in favour. Having gone this far, Prime Minister Anthony Albanese felt compelled to guarantee he would implement the cuts once in office. Labor supporters were reassured by the idea that the effects of the cuts could be reversed if Labor could win a second term.

It was only after Labor’s election victory that attention focused on the true horror of the cuts. Of the $184.2 billion the Parliamentary Budget Office estimates Stage 3 will cost over its first seven years, $137.9 billion is for Australians with $120,000 or more. Given the gender inequality in Australian wages, men will receive the vast majority of benefits.

But it’s not just the injustice of the cuts that counts. The crucial fact is the loss of revenue which can never be recovered and will only increase over time. Those who want to distract from the cuts point to positive measures like a crackdown on international tax avoidance.

But such measures will yield at most a few billion. As long as tax cuts remain on the agenda, Labor will be unable to deliver meaningful benefits to their supporters. JobKeeper will remain below the poverty line, frontline health workers and others will suffer real wage cuts, and critical social needs will go unmet.

None of this will change if Labor wins a second or even a third term. The arguments that led Labor to swallow the tax cuts will work even more strongly against the massive tax increases needed to reverse them. If the cuts pass, former Prime Minister Scott Morrison will have won the political debate, despite being voted out by voters.

But there is no reason to despair. The case for the tax cuts is as discredited as their author, Scott Morrison. Despite a series of articles attacking the cuts, no one from the L-NP came forward to defend them; indeed, a deputy, Russell Broadbentis out against them. The only person to defend the substantive cuts has been the reliable, if not nihilistic, untruth Guy Rundle at Crikey.

The tax cut promise that must now be broken

A decision to postpone or alter the cuts would be easy to get through in Parliament with the backing of the Greens and Independents, including David Pocock and Jacqui Lambie.

Labor’s response was equivocal. On the one hand, the PM Albanese and the Treasurer Jim Chalmers reiterated their promise. On the other hand, they reminded interlocutors that Labor opposed the cuts and only agreed to them because they were stuck with the way Morrison had set the agenda.

The obvious inference is that, as with the sham and reluctant president, Labor wants to get rid of the cuts but must be seen to be pushed. As Laura Tingle observed, the Prime Minister made it clear this week that he was happy to let a consensus build that his position is completely untenable and possibly eventually force him to give up on them.

The people who need to understand this most are the “rusty” Labor supporters whose reflexive response is to defend the government position of the day. The more they defend the government’s stated commitment to tax cuts, the harder it will be to abandon them.

Tax cuts have always been a bad idea, but the economic crisis caused by inflation, slow wage growth and shocks in energy markets have made the situation worse. Labor is expected to use its first budget in October as a basis for reorienting fiscal policy away from a handful of high earners and towards the needs of the vast majority of Australians.

John Quiggin is Professor of Economics at the University of Queensland. His new book, The economic consequences of the pandemic, is now available from Yale University Press. You can follow John on Twitter @JohnQuiggin.

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