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Labor’s tax cuts support is bad policy – but the Buffett rule could make it better

·4-min read
<span>Photograph: Nati Harnik/AP</span>
Photograph: Nati Harnik/AP

This week the Labor party made a terrible economic decision by agreeing to support the government’s entire stage three tax cuts.

Progressive income taxation is a cornerstone of our economy, but removing the 37% tax rate to have everyone earning between $120,000 and $200,000 pay the same top marginal tax rate as someone below the median income of around $60,000 means the ALP has effectively decided to stand for a flat tax.

Related: Labor’s capitulation on tax cuts shows the price it will pay to win power | Greg Jericho

The latest taxation data for the ATO showed that people on $120,000 earned more than 88% of taxpayers.

So, in effect, the ALP is now supporting a tax cut that only provides benefit to the richest 10%.

Click here if you cannot view the graph

Imagine not having the courage to argue against that.

You can tell those in the party hate it because no one is defending it. No one is willing to say the policy is good.

The best Anthony Albanese and Jim Chalmers in their media release and Katy Gallagher on ABC RN could say was the decision to support the tax cut provides “certainty and clarity”.

Please. The cuts aren’t due to come in until July 2024.

You think anyone on $200,000 is making decisions now based on what the income tax rate will be in three years?

Analysis done by the Parliamentary Budget Office for the Australian Greens shows that of the $184bn that the entire stage three tax cuts will cost over the next decade, 45% ($83.2bn) will go to people earning over $180,000.

This at a time when the budget is expected to be massively in deficit for years.

Unless a party in government is willing to embrace greater debt (something neither the Coalition nor ALP are) it will inevitably mean that government expenditure will need to be cut – expenditure that overwhelmingly assists low-to-middle income households.

Labor in the past has cut the top tax rate – but in the 1980s they did it while also broadening the tax system, by introducing capital gains tax and fringe benefits tax. In effect, the ALP gave with one hand but took from the wealthy with the other.

That is not happening here, but it doesn’t mean the ALP could not still do it.

The Australia Institute, an independent thinktank based in Canberra, has just released a paper investigating what makes a good tax. Its authors, Matt Grudnoff, Richard Denniss and David Richardson, argue that “it is important both economically and for society that we tax the right things in the right ways at the right rates.”

To this end they outline five principles of good taxation.

Firstly, the tax should minimise the change in behaviour unless it is something that we want less of (such as carbon emissions).

The tax should also reduce inequality and be levelled on those who are best able to pay.

Here they cite Adam Smith, who in 1776 was among the first to argue for progressive taxation, when he noted “it is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion”.

Related: Tax cuts backed by Labor will give men $2 for every $1 women get, Greens modelling shows

Up until this week that was a non-radical idea.

The last two principles are that the tax should be simple to comply with, administer and understand, and that it also should be difficult to avoid.

After examining several types of taxation, they found that a “Buffett rule” tax, which applies a minimum rate of tax on income for high income earners before deductions, is the only type of tax that fully meets all these principles.

Click here if you cannot view the graph

Anthony Albanese in 2015 actually proposed such a tax to the ALP national conference.

At the time he argued “one way we could deal with the tax system is to make sure that those people who should be paying tax do pay their tax” and he suggested the Buffett tax “is an issue on which we can mobilise people”.

This week the ALP took a massive step back on a fair tax system, but there are ways to correct it. A Buffett tax would still work within the new flatter tax arrangement but unlike the decision made this week it would be a truly progressive measure.

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