Life on the West Island - What took so long?

At last, the West Island government has bowed to the inevitable and adjusted the Stage 3 tax cut package to make it fairer, as called for by economists and progressive voters for years – including in a number of Life on the West Island columns published over the life of the current government.

The relatively modest changes will mean that around 90% of taxpayers will receive a tax rate cut, although those on very high incomes will receive a smaller reduction than in the original proposal.

The conservative opposition, strongly supported by Murdoch media, immediately cried foul, claiming that this was a broken promise and demanding an immediate election on the issue. To their surprise, the public reacted very favourably, with less than 20% of voters surveyed preferring the new policy to the package legislated five years ago but not due to come into effect until July 2024.

Initially, the coalition pledged to reverse the decision, but as public support for that plunged they steadily backed off until this week they agreed to pass the legislation necessary to amend the package. However, opposition leader Dutton tried to have his cake and eat it too, fulminating that Prime Minister Albanese had broken a promise but that the coalition would support the changes, not because they were fairer to low and middle income earners, but because the government had driven so many West Islanders into poverty.

Unfortunately for Mr Dutton, it seems that both voters and expert commentators disagree strongly with his convoluted reasoning. For instance, in a long opinion piece, Michelle Grattan of University of Canberra outlined the rationale and results of Albanese’s revamped package. She said, in part:

The government asked Treasury around Christmas for advice on cost-of-living relief. With the tax model in hand, it acted quickly this week: the policy went to the expenditure review committee on Monday, then on Tuesday to cabinet, followed by the full ministry, and to caucus on Wednesday.

According to Albanese, decisions were unanimous all through this process. Most caucus members will be positive, given the number of beneficiaries in their seats. At Wednesday's meeting, there was some questioning about how to sell the message and avoid "them and us" warfare. But those MPs with concerns about the reaction of wealthier workers in their electorates are likely to stay quiet.

The government is using to the hilt the authority of the Treasury to back its case for its recalibrated package, releasing a Treasury paper outlining the department's advice. The paper argues the new model has broad benefits.

"A redesign of the stage 3 tax cuts presents other opportunities, including enhancing the participation benefits of the tax cuts, especially for women, and distributing the future impact of bracket creep more evenly. This can be achieved with the same budgetary cost as the stage 3 tax cuts," the paper says.

"The redesign of the stage 3 tax cuts outlined in this document is estimated to provide cost-of-living relief to 13.6 million taxpayers. This option is broadly revenue neutral, will not add to inflationary pressures and will support labour supply."

Writing in The Politics, Rachel Withers outlined the dilemma that is posed to the opposition by the government’s “courageous” policy revision:

Labor has found a recalibration in which everyone gets a tax cut, and everyone except the top 10 per cent are better off, at a time when average earners (many of whom live in Coalition seats) truly need help. The government has worked hard to argue its case. But the Coalition has made little effort to be consistent in its approach. Every media interview has been more confusing than the last, as members of the Opposition try to argue for the old cuts, claiming Labor’s promise to retain the previously legislated cuts was supposed to be rock-solid, even while indicating they will vote for a reversal because the changes are needed. “If you’re a drowning man you’ve reached for a life raft, no matter what that life raft is,” said shadow finance minister Jane Hume on RN Breakfast, all but admitting, as host Patricia Karvelas noted, that people would be left drowning under the Coalition’s policy.

Last week at the National Press Club, Teals MP for Wentworth Allegra Spender (who represents the nation’s richest electorate) and senior economist Richard Denniss engaged in a spirited debate about taxation policy, from a starting point that Albanese’s policy changes were an essential “no-brainer.” Both agreed that much more far-reaching tax reform was necessary to reduce inequality and improve national productivity. The two opinion leaders agreed on some principles to guide the reform of the tax system:

• Do no harm: tax things we want less of, subsidise what we want more of;
• Do the simple things: improve our existing tax structures – like the Petroleum Resource Rent Tax (PRRT) to collect more revenue;
• Do the fair things: the market has to actively intervene in inequality; and
• Think big: move away from privatisation and fund public and skilled sectors.

Richard Denniss was particularly scathing about the distortions in the current tax system favouring rich resource companies and placing the tax burden on low income students: The Australian Government collects more revenue from HECS than it does from the PRRT. Thank you, children, you’re the backbone of our community, not the gas companies…

Despite the confected outrage at the West Island government’s supposed “broken promise” in revising the Stage 3 tax package, the real question is: what took them so long to acknowledge that the changes legislated by Scott Morrison were grossly unfair, as the benefits went overwhelmingly to those on incomes of more than $180,000 a year?

However, the first step in revising the nation’s archaic tax system has now been made. Will there be any appetite for more thorough tax reform?