This article is more than 2 years old

This article is more than 2 years old

The Coalition’s and Labor’s duelling income tax plans will both lead to a less progressive tax system because they don’t sufficiently address bracket creep, which disproportionately affects low and middle-income households, new modelling reveals.

But the Coalition’s plan will erode the tax system’s progressivity a little more than Labor’s, because it will leave the top 20% of households paying a noticeably smaller proportion of personal income taxation by 2027-28.

The Australian National University’s Centre for Social Research and Methods has compared the distributional consequences of the Turnbull government’s budget and Labor’s alternative personal income tax policy, which was announced by Bill Shorten last week.

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The modelling reveals how both parties’ policies affect average tax rates, what effect they have on revenue over a 10-year period and what impact they have on different households.



It concludes neither the Coalition nor Labor have done enough to address bracket creep, so average income tax rates will still be higher in 2027-28 than they are now, for all income groups, under both policies.

Facebook Twitter Pinterest Average change in disposable income per household, Coalition and Labor compared to current policy, 2019-20 and 2027-28. Illustration: Australian National University

It is ANU’s second modelling effort for the 2018 budget. It follows other modelling efforts by the National Centre for Social and Economic Modelling (Natsem), the Grattan Institute and the Australia Institute thinktank.

ANU’s comparison of the Coalition’s and Labor’s tax plans found the Coalition’s will see the average tax rate rise to 20.4% by 2027-28 – to be higher than it is now – while Labor’s will rise to 21.2%.

Facebook Twitter Pinterest Increase in average tax rates by 2027-28 for Labor and Coalition as compared to 2017-18 rates. Photograph: Australian National University

It says under current policy settings, the average tax rate in Australia will increase naturally from 19.2% (in 2019-20) to 21.6% (by 2027-28) if we accept the budget’s optimistic assumption for wages growth.

It shows the top 20% of households will pay less as a proportion of total personal income tax by 2027-28 under both the Coalition and Labor, because neither group has addressed bracket creep sufficiently.

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But it shows the decline will be biggest under the Coalition because high-income households will receive “much more significant tax cuts” under the Coalition’s plan.

Currently, the top 20% of households pay 61.2% of personal income tax.

ANU’s modelling shows this is projected to decline under the Coalition to 58.3% by 2027-28, thanks to significant tax cuts and bracket creep. Under Labor, the top 20% of households are estimated to pay 59.1% of personal income tax in 2027-28, thanks to bracket creep.

In dollar terms, households in the top 20% will gain $5,871 in disposable income under the Coalition’s plan in 2027-28, worth 2.3% of their total disposable income.

Under Labor, the top 20% will gain just $786 in disposable income, worth 0.3% of their total disposable income, while households in the third quintile (40-60%) and fourth quintile (60-80%) will see their disposable income rise by $983 and $1,164, respectively, worth 1.1% of total disposable income for both groups.

Labor’s policy favours lower- and middle-income households with modest, albeit larger, tax cuts compared with the Coalition.

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With the Coalition cutting taxes by more than Labor, the absolute size of its tax cut for 2027-28 is estimated to be $21.7bn, while Labor’s is estimated to be $7.6bn.

Assoc Prof Ben Phillips, one of the authors of the ANU paper, said by 2027-28, neither the Coalition’s nor Labor’s tax cuts will be significant enough to overcome bracket creep, so tax rates will continue to rise throughout the decade – particularly so under Labor’s tax policy.

But the main difference is that from 2024-25 the tax cuts under the Coalition policy for high-income earners will be larger than those projected under Labor’a policy.

“The Coalition’s approach will be marginally less progressive than Labor’s, but the tax system is getting less progressive anyway,” he said.

“My take-out from the modelling is that there’s not a huge difference, and I think it’s been a bit overcooked the story that the Coalition’s policy is leading to a flat tax system that will be wildly regressive.

“There’s not a lot of difference between the two. There is some, but it’s not a wild difference in 2027-28.”

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Meanwhile, new research from the progressive thinktank the Australia Institute shows roughly two-thirds of the benefit of the government’s proposed income tax cuts will flow to men, with men dominating the ranks of high-income earners.



“The proposed tax cuts, including the flat tax plan, will increase inequality in Australia’s tax system, and the benefits going to the top also translates to the benefits going primarily to men, not women,” Ben Oquist, the executive director of the Australia Institute, said.

“For every dollar in tax cuts for women, men get two … It’s a compounding of the gender pay gap and exposes the unfairness of the flattening of Australia’s progressive tax system.”