Incentives matter: Australia's tax policy cannot be based on dodgy statistics
By Dr John Humphreys, Australian Taxpayers’ Alliance Chief Economist
Journalists are wielding statistics based on questionable modelling in their crusade for higher taxes. Eager to undo one of Australia’s most significant microeconomic reforms in decades, journos are putting pressure on the Albanese Government to instead embrace higher taxes.
A round of income tax cuts scheduled to start in 2024 has the potential to improve economic efficiency by about $10 billion per year and boost economic output by roughly $30 billion per year. This is on top of the direct benefit the cuts will afford workers, and is exactly the sort of policy we need to address stagnant productivity and declining real wages. But journalists are trying to undermine economic reform.
In a piece published by the Sydney Morning Herald, Anthony Galloway argued for the government to scrap the upcoming income tax cuts. To support his argument, Galloway cites research done for the Greens that exaggerates the revenue impact of these tax cuts. But, as I detailed when the tax policies were first introduced, the government’s estimates ignore the role of incentives; such an oversight renders the calculations useless.
In reality, based on mainstream estimates of how people respond to tax changes, the actual impact on revenue is likely to be about 40% less than reported by activist media. This is detailed in table 6 of my report (p7), with the “stage three” tax reforms represented by policies 4-7 on that table. By ignoring incentives, it’s possible to pretend the tax cuts could cost $156 billion until 2028/29 but, once behavioural changes are factored in, the revenue cost drops to $88 billion. The recent estimates done for the Greens examine a different period so can’t be directly compared to the above estimates but the underlying point remains: Dishonest modelling by the government exaggerates the revenue cost of tax cuts.
Worse still, the government’s modelling fails to even consider the economic benefits from the reform. The tax cuts will shrink the marginal tax rate most Australians face from 37% or 32.5% down to 30%* and represent the single most significant reform Australia’s income tax system has undergone since the introduction of the GST back in 2000. As shown in my modelling from 2019, the cuts are expected to improve economic efficiency, boost economic output and help bolster workers’ income as the cost of living rises.
In his story, Galloway laments how tax cuts will mostly benefit people who pay more tax. Under the current system, men pay significantly more income tax than women so, when income taxes are reduced, it’s those same over-taxed men that reap the majority of the benefit. This is a blatant attempt to use identity politics to rally people against tax reform. Suffice to say, the income tax system should treat men and women equally and the debate should focus on whether changes provide a net benefit to Australians, regardless of race, sex, or any other personal characteristic.
The truth is that Australia desperately needs serious microeconomic reform to help boost productivity growth, which is the only sustainable driver of higher wages. The “stage three” tax cuts were a good start. Australia will need to see more reform like that going forward, not less.
*Not counting the misnamed and misunderstood Medicare Levy