Labor’s tax cuts have now been embedded in law following their passage through the Senate earlier this week.
The legislation ensures that from 1 July 2024, the 19 per cent tax rate reduces to 16 per cent (for incomes between $18,200 and $45,000), while the 32.5 per cent tax rate reduces to 30 per cent (for incomes between $45,000 and the new $135,000 threshold).
The threshold above which the 37 per cent tax rate applies, increases from $120,000 to $135,000, while the threshold above which the 45 per cent tax rate applies, increases from $180,000 to $190,000.
“Our cost‑of‑living tax cuts are legislated, locked‑in, and will roll out from July 1,” said Treasurer Jim Chalmers.
“With real wages increasing, Australians are earning more, and now they will get to keep more of what they earn, because of our bigger tax cuts for more taxpayers.
“This is a big win for working families, a big win for women, and a big win for middle Australia.”
Labor’s recalibration of the stage three tax cuts was confirmed back in January and marked a significant change from what was originally legislated under the Coalition government.
The Labor party was at the time accused of backflipping on its election promise after it said it would maintain the legislated cuts in the lead-up to the last election.
Doing the media rounds in January, Treasurer Jim Chalmers defended Labor’s surprise move, noting that the government has “come to a different position” for “the best possible reason”, which is “we can provide more tax relief for more people to help them with the cost of living”.
“Now we are being upfront with people and saying we have come to a different view. We’ve come to a different view because what we’re proposing today is better for middle Australia, better for cost‑of‑living pressures, better for women and workforce participation and better for the economy, without adding to the inflationary pressures that we are dealing with,” Mr Chalmers told ABC Radio at the time.
With inflation trending down but still above the Reserve Bank’s (RBA) target range, the worry is that those set to reap the rewards come July may spend their extra cash on discretionary items, putting further pressure on the economy.
While the common understanding is that the marginal propensity to consume is higher for the lower income, Wilson Asset Management portfolio manager Matthew Haupt told InvestorDaily earlier that any impact is likely to be limited.
“It would be hard to see a huge kick in retail spending in Australia off these tax cuts. Yeah, it would be more for non-discretionary, it would be used for that sort of stuff,” he said on a podcast.
“The impact will be quite muted I would have thought.”
Similarly, at the time, Westpac’s Luci Ellis said changes at the margin of the tax relief from July do not change the overall macroeconomic story.
Touching on the commonly held consensus mentioned earlier, that lower-income and middle-income taxpayers tend to spend more out of every dollar of extra income, Ms Ellis argued that since lower-income households have seen stronger income growth on average than their higher-income peers, “those marginal propensities to consume might not be a good guide to current behaviour”.
Moreover, Ms Ellis explained that by retaining the 37 per cent bracket, “the system is not flattened out as much as originally planned”, meaning that more households will still face some fiscal drag, and fiscal policy will retain more of its automatic stabilising properties.
For Mr Haupt, the bigger concern regarding the government is which industry they might “attack next”.
While speculation was brewing earlier this month that Labor could be considering changes to negative gearing or capital gains amid mounting pressure from the Greens, Treasurer Chalmers shut down the rumours, telling the media “that’s not something that we’re proposing, not something that we are considering, not something that we are working up”.
