Grattan Institute report finds budget biggest loser in Albanese government’s stage 3 tax shakeup

The biggest loser from the Albanese government’s revised tax plan may end up being the federal budget, especially if future Coalition governments reintroduce cuts for higher earners.

New analysis from the Grattan Institute shows the tax plan the Albanese government will introduce to parliament this week will cost the budget a similar amount to what the original stage 3 plan was forecast to cost – about $20bn a year.

But, the paper found that if a future Coalition government were to reintroduce the original benefits for high income earners while keeping the tax cuts for low- and middle-income earners outlined in Labor’s plan, that would add a further $10bn a year strain on the budget, or an extra $115bn over the decade.

Opposition Leader Peter Dutton on Friday indicated the Coalition wouldn’t stand in the way of tax cuts to low- and middle- income Australians, stating the Liberals are “the party of lower taxes”, but the final position will be determined in a party room meeting on Tuesday.

The Coalition could wave the bill through, could try and introduce amendments to reinstate parts – or all – of the original stage 3 in addition to Labor’s changes, or could block it.

But moving to reinstate the full plan – flattening the rate for all taxable incomes between $45,000 to 200,000 to 30 per cent, and pushing that upper limit back up from $190,000 – as well as agreeing to tax breaks for low- and middle- income earners would cost the budget.

Labor’s revisions will mean incomes between $18,200 and $45,000 will be taxed at a lower rate of 16 per cent. The 30 per cent bracket will be extended to cover incomes between $45,000 and $135,000, and the 37 per cent bracket will remain for incomes between $135,000 and $190,000. Above that, a 45 per cent rate will apply.

More than 11.5 million taxpayers will be better off under Labor’s changes, while about 1.1 million people earning more than $150,000 will receive only half of the original, promised, tax cuts.

The Grattan Institute said while Labor’s tax cuts would overwhelmingly benefit Australian taxpayers, it would limit any significant overhauls to the broader taxation system.

The statement came days after independent MP Allegra Spender told the National Press Club Australia needed “ambitious” tax reform, beyond tinkering with the edges of tax policy,

“These tax cuts will also make it harder for the government to make other growth-boosting tax reforms, such as raising the GST to fund cuts to other, less efficient taxes,” the institute said.

“Such reforms typically cost the budget revenue as extra money is paid out to compensate the losers. The commitment of both major parties to big income tax cuts now, means there will be less money in future to ‘buy’ more worthwhile reforms.”

Under the Coalition’s original stage 3 plan, which was designed to target bracket creep, the 37 per cent tax bracket would have been abolished and all taxable incomes between $45,000 and $200,000 would have been taxed at 30 per cent from July 1, with incomes above that taxed at 45 per cent.

The Opposition says the changes will make bracket creep worse in the long term, pointing to the fact they increase tax revenue by $28bn over 10 years, compared to the original stage 3 tax cuts.

The Grattan paper also found bracket creep would erode the value of Labor’s tax cuts over time, but ultimately middle-Australia would win in the long term.

The analysis found the share of people with a taxable income between $135,000 and $190,000 will rise from seven per cent in 2024-25 to 13 per cent in 2033-34.

The share of people in the top bracket is expected to double over the next decade, from six per cent to 12 per cent.

But, ultimately, the paper found the vast bulk of Australia taxpayers would benefit from the revised package, “despite the impact of bracket creep over the next decade”.