It is true that the ultimate design of the income tax system proposed by the Coalition – a flatter structure in which everyone earning between $41,000 and $200,000 pays a single marginal rate of 32.5 cents - bears an uncanny resemblance to an “indicative” proposal from the Ken Henry tax review. But, crucially, it also ignores many of the key recommendations of that review – including “base broadening”, through the abolition of complex tax concessions and offsets – thus rendering the Turnbull government’s income tax vision a severely disfigured version of that best principles design. But wait, there’s more. To get to this ultimately inferior design, the government also proposes a strategy – of adding a new tax offset – which Henry expressly warned against. Good work, fellas. Loading Replay Replay video Play video Play video So, let’s unpick the trick. First, the bait. In what can only be described as the most calculated and outright bribe for swing voters ever designed, last week’s budget birthed the idea of the LMITO – the Low and Middle Income Tax Offset.

It’s like a richer cousin to the existing LITO – Low Income Tax Offset – which the Henry review recommended be abolished. It also sits beside the SATO – Senior Australians Tax Offset – which goes to over 65s and which is such an egregious form of age discrimination that economist Saul Eslake can’t figure out why young people don’t march in the streets against it. Never heard of any of these? That’s the point. Australia’s headline marginal tax rate schedule does not include the effect of these – and other – tax concessions that apply at the end of the financial year and vary a person’s actual tax paid quite dramatically. The budget will hurt many mothers who work part-time. The fact that most people don’t know about them means they do little to encourage most people to take on extra work throughout the year.

But there is one group of individuals who are particularly sensitive to their effect: part-time working women. When mums sit down to do the sums on whether it’s worth working more – or at all – they immediately notice the childcare costs that will eat up a fair chunk of any extra dollars they earn. But mums who work more also lose out in other ways. They must, of course, pay income tax. Their extra income may also disqualify their family from receiving some family payments. Loading And, crucially, tax offsets like the LMITO affect their sums in a very pernicious way. To stop the benefits going to very high income earners, the offsets phase out beyond a certain income threshold. So, for every dollar earned over a certain amount, the benefit is reduced by 1.5 cents. So mums who earn additional dollars above the threshold end up paying a much higher "effective marginal tax rate" on their hard earned cash. In effect, the offset reduces the reward for working and earning more.

It’s one way to stop bracket creep – but not the sort you want. The Henry review recommended the complete abolition of the LITO, with just a higher tax free threshold instead: “The LITO should be incorporated into the personal income tax rates scale, both for reasons of transparency and to retain the progressivity of the personal income tax rates scale.” Former Labor treasurer Wayne Swan followed Henry’s advice in designing the carbon tax compensation package. That package reduced the LITO and increased the tax-free threshold. To stop the benefits of a higher tax-free threshold bleeding up to very high income earners, Swan also increased the 30-cent rate to 32.5 cents. Morrison has moved in the opposite direction of Henry by adding another offset (which Bill Shorten then promised to double). But then Morrison changes his mind, and after four years the new offset is abolished. Lord make me tax pure, but not yet! Treasurer Scott Morrison meets the media on Tuesday before his budget speech. Credit:Alex Ellinghausen Which brings us to the switch. From 2022, the Coalition proposes to ditch the LMITO. To ensure no one has to start suddenly paying higher taxes, the LITO is increased. Then, then the real fun begins for higher earners, as tax thresholds are progressively increased and the 37-cent rate abolished.

Ultimately, thresholds and rates are changed so that the 94 per cent of taxpayers who earn between $41,000 and $200,000 pay the same marginal rate of 32.5 cents. Ken Henry came up with a similar “indicative” design in his review. He had a tax-free threshold of $25,000, above which everyone paid 35 cents on every extra dollar earnt up to $180,000, then 45 cents from above that. Henry reckoned “over 97 per cent of people over the tax-free threshold would be subject to the 35 per cent rate of tax.” It’s true that a simpler and flatter system is what Henry recommended. But Henry’s vision of tax simplicity wasn’t just about cutting the number of tax rates. It was about removing complexity across the board - including myriad concessions, exemptions, and offsets - as part of a broader package of tax reform. And not everyone supported Henry’s flat tax vision at the time.