MELBOURNE, Jul 8, 2020, The Age. Billions of dollars worth of personal income tax cuts would be brought forward by at least a year to help boost the economy out of the coronavirus recession under a plan the Morrison government is considering, The Age reported.
The move, which has already been backed by the Labor Party as a way to help support household consumption, would result in the 2022-23 tax cuts – worth about $5 billion – being announced in the upcoming October budget and start from July 1 next year instead.
Bringing forward the already-legislated tax reform would take the top threshold for the 19 per cent tax rate from $41,000 to $45,000. The low income tax offset is slated to increase from $645 to $700.
Full lockdown restrictions across Victoria could drain the state’s economy of $1 billion each week, Treasurer Josh Frydenberg has estimated.
For people earning between $22,000 and $30,000 a year, the tax cut would be worth $55. People earning more than $50,000 would save $540 a year.
Treasurer Josh Frydenberg on Wednesday revealed the plan was under consideration.
“We are looking at that issue and the timing of those tax cuts because we want to boost aggregate demand, boost consumption, put more money into people’s pockets and that is one way to do it,” he told ABC Radio.
Labor, top economists and members of the Coalition backbench have been urging the government to consider bringing forward the tax cuts. Shadow treasurer Jim Chalmers said Labor would immediately engage with the government on the issue.
“There has been a case to bring forward or to consider bringing forward some of those tax cuts. In the first instance, that should be focused on the second stage of the tax cuts which were planned for two years down the track,” he said.
Prime Minister Scott Morrison would not be drawn on bringing forward the tax cuts, saying it would only be addressed “in the context of the budget”.
The actual cost of the next two tranches of the government’s income tax cuts, which last year were estimated at $143 billion between 2022-23 and 2029-30, has fallen slightly because of the weakness in the economy.
The government’s third raft of reforms, legislated to start in 2024-25, deliver much larger benefits to high income earners. The 37 per cent tax rate will be abolished, with all incomes between $45,000 and $200,000 taxed at 32.5 per cent. A person earning $200,000 gains $4415 a year while someone on the average full time wage of $80,000 will get $1415.
Slow wage growth, which is forecast to be even worse because of the recession, will reduce the number of people pushed into higher tax brackets and so bring down the overall cost of the reforms.
The government is already facing the largest budget deficit on record with analysts tipping a shortfall of at least $200 billion for 2020-21. Government debt is already at a record high of $691.3 billion.
Any tax change would be on top of the government’s planned replacement for the $70 billion JobKeeper wage subsidy and the $550-a-fortnight coronavirus supplement for people on welfare.
The government has promised to deliver a “targeted” and temporary income support measure to help those affected by the end of JobKeeper or the coronavirus supplement, which are both due to end in September.
Mr Morrison said the program would be tailored to deliver support where it is necessary, ruling out specific assistance to Victoria.
The lockdown of Melbourne and shuttering of its border with NSW is expected to hurt the national economy, with Westpac downgrading its estimate for Australia for a contraction of 4.2 per cent in GDP this year. It had previously predicted a 4 per cent contraction.
Economic activity in Melbourne alone could fall by 1.5 per cent through the six-week lockdown, but that lost activity would be recovered quickly once social distancing rules are eased.
Outside of personal tax, there is also pressure for the government to re-consider corporate tax reform in the October budget.
Research into global company tax rates released by the OECD on Wednesday showed that between 2000 and this year, the average global corporate tax rate fell to 23.1 per cent from 30.8 per cent.
Australia’s largest firms pay a 30 per cent tax rate, while for smaller companies it was reduced to 26 per cent this year on its way to 25 per cent.
The OECD found Australia’s effective marginal tax rate for businesses was the highest of the world’s rich nations.
Australian businesses have also complained about proposals to overhaul the nation’s research and development tax incentives. The OECD found Australia was mid-field when it came to these incentives, with nations such as the United States, Great Britain, Ireland, Canada and France all being more supportive.
Shane Wright is a senior economics correspondent for The Age and The Sydney Morning Herald.