Happy Saturday!
My name is Harry Sekulich and I’m one of the journalists here at The Daily Aus. It’s lovely to meet you all.
For my debut newsletter, I thought I’d make this a tribute to every child who’s had a parent work as an accountant (Dad, if you’re reading, hi).
Here’s my attempt at making them proud: let’s talk about tax!
This week, stage 3 tax cuts are back in the political news cycle after Prime Minister Anthony Albanese confirmed the cuts will still be introduced from July. Everyone earning above $45,000 will receive a tax cut - meaning more money in their bank account from the second half of this year. Although it’s a tax cut for everyone, higher-income earners will benefit the most.
Why? Let’s get into it.
I don’t want to bog everyone down in numbers – but here is the basic breakdown of how our income is currently taxed:
First $18,200 (the threshold): not taxed
$18,200 –$45,000: 19 cents for every dollar in this range
$45,000 – $120,000: 32.5 cents for every dollar in this range
$120,000 – $180,000: 37 cents for every dollar in this range
>$180,000: 45 cents for every dollar above this range.
Basically, the more you earn, the more you pay in tax, because Australia has a ‘progressive’ tax system.
But now, stage 3 is set to shake the tax tree. Instead of having a higher rate of tax for certain income ranges, the stage 3 tax cuts mean people earning between $45,000 – $200,000 a year will end up paying the same rate of tax.
For all those visual learners out there (we see you), here’s what we’re talking about:
First $18,200 (the threshold): not taxed
$18,200 –$45,000: 19 cents for every dollar in this range
$45,000 – $200,000: 30 cents for every dollar in this range
>$200,000: 45 cents for every dollar above this range.
So where did this idea come from? The stage 3 tax cuts are actually the brainchild of former Prime Minister Scott Morrison. As hinted in the name, this is the final of three stages of cutting taxes. The other two stages were carried out between 2018 and 2020, when the Coalition was in Government.
The world in which stage 3 tax cuts were hatched feels increasingly distant: the war in Ukraine wasn’t raging, COVID-19 didn’t exist, and annual inflation was hovering below 2% (these days, it’s at 5.4%).
Now, the Albanese Government is facing increasing pressure to abolish the tax cuts out of fear it will add to inflation. But this week, Albanese confirmed “tax cuts will happen in July”.
Why?
In short, Albanese promised voters these tax cuts before the 2022 election. Labor voted to legislate the tax cuts in 2019 when it was in Opposition, despite some initial hesitation. And no politician wants to be accused of backflipping on an election pledge.
In defending its decision to keep the stage 3 tax cuts, the Government has said the tax cuts aren’t expected to make inflation (rising prices) worse.
Not everyone agrees with the Government. There are some economists who say the cuts will add to inflation.
Let’s think about this in basic terms. Picture a market stall selling chocolate (my favourite treat). The vendor is selling blocks of chocolate at $5 each. But then, when a whole section of the population gets more money in their pocket via a tax cut, demand for this treat will increase – because more people can afford the luxury of buying chocolate! But the vendor doesn’t have enough blocks of chocolate for everyone. So the vendor decides to increase the price of a block of chocolate to $6.
Some economists believe this is what’s going to happen across the economy – prices will go up because so many more people will have extra cash to spend.
However, it’s worth noting this view isn’t unanimous. Some economists believe stage 3 will have little to no impact on inflation.
One thing’s for sure: there will be a lot of noise about this in the coming months.
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