26 April 2016
by Phillip Coorey

Double tax cut for best paid in federal budget

The highest-paid Australians are set to receive two income tax cuts in next week's federal budget, setting the scene for a intense battle with Labor, which believes scarce revenue should be skewed towards boosting services and helping people on lower incomes.

As well as honouring a promise to next year abolish the so-called temporary deficit levy, a 2 percentage point tax increase imposed on earnings over $180,000, the government will raise the $80,001 income tax threshold margin above which each dollar earned is currently taxed at 37¢.

The threshold increase, which is likely to be modest, is designed to counter the effect of bracket creep, in which workers move into higher tax brackets as wages grow.

To help fund the bracket creep tax cut, the Australian Public Service could be hit with another efficiency dividend, sources said.

The two tax moves mean that somebody earning over $180,000 will gain from the abolition of the deficit levy. Every dollar they earn between $80,001 and whatever the new threshold is will be taxed at 32.5 per cent, which is the current tax rate on earnings between $37,001 and $80,000.

If, for example, the threshold was lifted to $85,000, a high-income earner would receive an extra $225 in their pocket a year.

Introduced to soften the political impact of the 2014 budget aimed primarily at those on low incomes, the so-called Temporary Budget Repair Levy was one of the few controversial measures that Labor supported in the Senate, figuring there was little voter sympathy for a broken tax promise that affected only people earning more than $180,000. It cost someone earning $300,000 an extra $2400 a year.

The levy was legislated to disappear after three years but last week, Opposition Leader Bill Shorten rebadged its abolition as a tax cut for the well-off. He said if Labor won the election, it may legislate to make it permanent if "it comes down to a choice between cutting funding for hospitals, cutting the pensions, cutting funding to schools or looking at either corporate tax reductions or reducing tax cuts to the highest income earners".

On Monday, shadow treasurer Chris Bowen said "it's completely keeping within the government's priorities to provide two income tax cuts for high income earners while cutting the age pension, family payments and cutting funding to schools and hospitals".

"The government has spent the last few years railing against a debt-and-deficit disaster as they've presided over higher debt and deficits themselves, but now they want to prioritise handing money out the door to high-income earners," he said.

Limited options
The government's options for cutting income taxes were severely limited by the decision to leave unchanged the rate and base of the Goods and Services Tax. Lifting the $80,000 tax rate was deemed the most effective and affordable approach to doing something about bracket creep. Increasing the $37,000 margin would have been prohibitively expensive.

The government will argue that those on lower incomes benefited from the abolition of the carbon tax and the retention of the compensation. They are also likely to benefit from the reduction of superannuation tax concessions for the well-off and using that money to bolster the their super savings.

The abolition of the deficit levy is budget neutral because it has already been factored in but the bracket-creep measure will have to be funded. Despite a pledge in last year's budget to give the public service a break from an ongoing run of increased efficiency dividends, which began under Labor, it will probably be asked again this year to do more.

Despite last year's budget saying "the government is returning the efficiency dividend to the base rate of 1 per cent from 2017-18, subject to ongoing monitoring", sources said there will be extra cuts.

Costings show a 1.25 per cent efficiency dividend would raise an extra $610 million over four years. A 1.5 per cent dividend would raise an extra $1.2 billion over the same period.