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Income tax plan likely to pass, but some of the tax talk ‘just not right’

Income tax plan likely to pass, but some of the tax talk ‘just not right’

With the Senate agreeing to pass the first two stages of the government’s income tax cut plan, the Tax Institute has weighed in on the claims and analysis made during the debate, which is often not accurate or simply untrue.

Tax&Compliance Jotham Lian 21 June 2018

The Senate made amendments to the government’s three-stage, seven-year individual tax cut plan yesterday, omitting the third stage of the plan which aims to flatten the tax bracket to 32.5 per cent for those on taxable incomes of $41,000 to $200,000, removing the current 37 per cent tax bracket completely by 1 July 2024.

Speaking to Accountants Daily, the Tax Institute’s senior tax counsel Professor Robert Deutsch pointed to flaws in some arguments being floated during the back-and-forth debate. For example, he noted the government’s plan is being opposed by Labor on the basis that a high earning taxpayer would be paying the same marginal rate on their next dollar as those on a lower income.

“Labor is making a point that is true in that the marginal tax rate on somebody on $50,000 and $180,000 will be the same but the implication they try to take from that, that they are somehow equivalent is just not right, because it fails to take into account the overall effective tax rate that will be applicable, and the difference is sizeable with the person on $180,000 paying almost double in percentage terms compared to the person on $50,000,” said Professor Deutsch.

According to the Tax Institute’s analysis of post 1 July 2024 tax rates, a person earning $50,000 would pay an effective tax rate of 16.01 per cent, or $8,007, while a person on $180,000 would pay an effective rate of 29.5 per cent, or $53,107.

“It is true that amount is significantly less than what a person on a $180,000 would pay in 2018 — about $4,700 less. Labor keeps making that point and it is true, there is going to be a bigger reduction for those with higher incomes under the coalition plan than for those on lower incomes but that is because there is a bigger starting point,” said Professor Deutsch.

“But to suggest in any way that somebody on $50,000 is paying the same tax or even the same tax rate as somebody on $180,000 is just not true. It is true they would pay the same marginal rate on the next dollar they earn but that doesn't really give you a full picture.”

Treasurer Scott Morrison has been staunch in his position to refuse to split the package, rejecting suggestions during a doorstop interview by stating, “we’re not splitting the bill” repeatedly.

While there has been criticism of the complicated nature of the government’s three-stage plan, Professor Deutsch believes it has stemmed from a Senate that seeks to block whoever is in power from governing.

“I think Australia is being really hampered at the moment by a very obstructionist Senate and I say that on the basis of looking at company tax rate reform, the government has been forced into a position where they've made the reduction in rate incredibly complicated, extremely difficult to explain concisely to somebody who is looking to invest in Australia and that I think is a real condemnation not so much on the government but of the fact of the Senate is operating to constrain the way in which the government can govern,” said Professor Deutsch.

“The government is having to go into a fairly convoluted process to deliver a three-stage package that most other countries would handle in one stage and we are just making the whole system more and more complicated for no discernible benefit in my view.

“I am not making this as a political comment because I would say exactly the same thing if Labor was in control of the House of Representatives. My view is that whoever controls the House of Representatives should be allowed to govern and that is not happening in this country and it hasn't been happening for a long time.”

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Income tax plan likely to pass, but some of the tax talk ‘just not right’
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