Australians will see the first of several tax reforms from the Morrison Government in this year’s tax return. The latest election has led Prime Minister Scott Morrison to claim a political ‘mandate’ to pass some of the largest tax cuts in a generation. But will the average Australian family benefit, or is this just another political promise with little real advantage for Australian households?
The answer is both yes and no. While all Australians would hypothetically financially benefit from these tax reforms, the reforms also bring along budgetary disadvantages. This means that the negative impacts of the reforms on government services will outweigh the financial benefits for numerous Australian families.
To summarise the tax reforms, they will take the shape of three separate policies, labelled tranches. The first tranche will be implemented in the 2018-2019 financial year, and lifts the low- and middle-income tax offset to include levels of income up to $126,000. The maximum amount of the offset will be lifted from $530 to $1080. Importantly for lower income earners, the base amount of the tax offset will be increased from $200 to $255. The second tranche will be implemented from the 2022-2023 financial year, and lifts the 19% and 32.5% tax bracket. The third tranche will be implemented in the 2024-2025 financial year, and will lower the 32.5% tax bracket to 30%. This tranche will also extend the bracket to cover what used to be the 37% tax bracket. Additionally, it will push the minimum income for the highest tax bracket of 45% from $180,000 to $200,0000. These reforms can be seen as a move towards a flatter, rather than more progressive, tax system.
The most significant aspects of these reforms for families are their implementation schedules and their impacts on essential services. Low- and middle-income individuals will experience the fastest change as they receive tax offsets this year. However, the second and third tranche, primarily regarding middle- and high-income individuals, carry a start date of at least 2022. For Australian families this three-year delay could see multiple movements between tax brackets as their fortunes change. It undermines the ability of families to adequately prepare and form economic expectations.
Perhaps the most important aspect of these policies is their estimated cost to the government of at least $158 billion over the next decade in foregone tax revenue. If the reforms are fully implemented the government may find that they have to pull the purse a little tighter. Programs like Medicare, Centrelink, and the NDIS that underpin the health and prosperity of families, especially lower income families, may find themselves the victim of smaller government budgets. It is unlikely that the money these households save from the tax offsets or lower rates will be able to cover the services provided by these programs.
An often-overlooked segment of society that will not see any benefit are families with members working in Australia’s black economy. Frequently a source of employment for disadvantaged and underprivileged Australians and non-naturalised immigrants, the nature of their work precludes them from reaping any of the rewards of the new system. Due to the reform’s impact on government services, these members of society and their families may find themselves the victims of reduced government services without tax offsets or lower marginal tax rates.
An aim of Morrison’s tax reforms is the intention to put more money into the pockets of Australian families. However, the small financial gains Australian families will make are outweighed by the subsequent cuts to essential government services. Nowhere will these cuts be felt worse than by lower-income families and members of Australia’s black economy.