Tax Cuts For The Rich: The Stage 3 Tax Cuts, Inflation, Recession, & The Coming Credit Crisis in Australia ...

“The former governor of the Reserve Bank, Bernie Fraser, has criticised the Labor government for sticking to the “very dodgy” stage-three tax cuts, arguing they should be repealed to allow for spending on social programs.”??- Sarah Martin, The Guardian Australia, 6th October 2022

Dr Jim Chalmers, the Australian Treasurer, declares that the Stage 3 tax cuts will now cost the economy $254 billion over 10 years. This comes at a time when the Australian economy has a gross debt of $963 billion, as of June 30th, 2022. Obviously, we cannot afford to be so overly generous to the wealthier sections of the community when times are tough. Tax cuts for the rich: The stage 3 tax cuts, inflation, recession, and the coming credit crisis in Australia what will it look like. Economically speaking, it does not make sense to reduce taxation revenues when we need to return the budget to manageable levels of debt. Governments, generally, do not splash the cash during high inflationary periods, as this promotes consumer spending and even higher inflation results.

The Politics of Reducing Taxation at The Top End

The reluctance of the Albanese federal government to reverse these very expensive tax cuts is a political decision. The ALP was elected on a promise not to block these Liberal/ National Party measures if they came to power. The stage 3 tax cuts are scheduled to come into effect in 2024.

“Stage three?abolishes the 37% marginal tax bracket completely and lowers the 32.5% marginal tax rate to 30%. It also raises the threshold for the 45% marginal tax rate, meaning everyone earning between $45,000 and $200,000 will pay the same 30% tax rate.” – Remeikis, October 2022

This Morrison government legislated largesse for the rich is a regressive taxation measure. This means it makes our taxation system less fair for the majority of Australians.

Former PM Malcolm Turnbull has come out and backed the stage 3 tax cuts. One could be cynical and say this is just a very rich guy looking after his own interests at the end of the day.

“ ‘I don’t think you would legislate them, certainly not in the way they were changed in 2019 (by Scott Morrison), today,' he told the ABC’s The Business… However, he said that Labor had made the mistake of promising to keep them… ‘There is a big issue of integrity here,’ he said.”??- ABC The Business, 21 October 2022

It seems like another case of political expediency versus the economic truth of the matter and in our short cycle political system we know what usually wins out. This is why something like climate change cannot be addressed by our current democratic set-ups around the world. Our lifetimes are too short to adequately comprehend things like global warming over large timeframes. Too many people are content to complain about higher prices for fuel, gas, and electricity. We are not willing to suffer in the short term even for the betterment of the future for our children.

“The hardest thing in the world to understand is the income tax.” – Albert Einstein

The Current Marginal Tax Rate

The current system in 2022/23 is set at this rate:

Earn up to $18, 200 and you pay no tax.

On your next $26, 800 and you will pay 19% tax.

On your next $75, 000 you pay 32.5% tax.

On your next $60, 000 you pay 37% tax.

On every dollar earned over that you will be taxed at a rate of 45%.

From 2024/25 that top tax rate must earn over $200, 000 to be taxed at 45%.

The 37% rate is abolished and the 32.5% falls to 30%.

This means less tax paid by wealthy Australians and less taxation revenue for the government to spend on things like health and education.

Cutting Taxes For The Wealthiest Australians: Why?

Why would it be a good idea to cut the taxes for the rich in Australia? Aspirational politics sees popular votes in rewarding those making a lot of money. Conservative governments traditionally believe in looking after those with capital, first and foremost, as they see those in business with assets driving the economy. The Republican Party in America and the Tories in Great Britain are both lower taxing governments for business and their wealthier citizens. The recent Liz Truss proposed tax cuts in the UK, which were dumped along with her leadership are a pertinent example of this policy bias by conservative governments. During the Trump presidency in the US the corporate tax rate was cut from 35% down to 21%, whilst the individual top tax rate was lowered from 39.6% to 37%.

“Once you realise that trickle-down economics does not work, you will see the excessive tax cuts for the rich as what they are - a simple upward redistribution of income, rather than a way to make us all richer, as we were told.”??- Ha-Joon Chang

‘Neoliberalism’ is a term which refers to governments dedicated to reducing their influence on a nation’s economy and letting private enterprise run the show. The world has seen four decades of neoliberalism as the dominant management philosophy. Clear indications of this policy have seen the privatisation of utilities like power, transport, and telecommunication entities in places like Australia. These previously state run institutions were privatised on the promise of cheaper prices and better service. The results, forty years later, are at best mixed. Right now, we have gas and electricity prices going through previously unimagined ceilings to the consternation of consumers and businesses. The market can take care of business, when things are good, but when things go south via situations like the war in Ukraine - it is another matter entirely. There is a place for government in the management of the economy and it is at times, such as now, when we need them.

Bracket Creep?

The stage 3 tax cuts were, apparently, designed to fix bracket creep. What is bracket creep? It is the occurrence which sees taxpayers paying higher taxes due to their nominal income rising over time and tax brackets not moving with inflation. However, the only way to end bracket creep is to index income tax scales to average weekly earnings, or inflation, annually on the first day of the new financial year. - NDH, October 2022

The world is in a high inflation spiral with many leading economies heading for recession on the back of high prices and dwindling demand. This type of inflation has been labelled supply side inflation. The cause of the rampant inflation choking economies around the globe is rooted in supply chain failures and delays pushing up prices. Covid lockdowns and protocols meant that goods were bottle-necked in ports because of labour shortages and processing delays pushing up prices dramatically. The knock-on effect of these higher costs?has pushed up prices for everything. In Australia, we have had floods compounding these issues to reduce the supply of fruit and vegetables and other food crops. This sends up the prices and promotes even more inflation within the economy. Inflation in Turkey and Argentina is at 83%. In Germany and the UK 10%. At 8% are the US, Spain, Italy, and Mexico. Australia is currently at 7.3%, the highest level in 32 years (SMH 26/10/2022). Inflation, according to the economists, is not going away anytime soon. The likely scenario will see countries go into economic recessions, as part of the never ending boom and bust cycles of the capitalist system. The quickest cure for inflation is a recession.

Wealthier Australians can afford to ride out a recession, whereas their poorer counterparts will suffer the economic tightening of the screws. Right now, we have record high rents and rapidly rising interest rates attacking the budgets of renters and new home buyers living on struggle street. Governments will not splash the cash to alleviate the rampant cost of living pressures because poorer people spend whatever they are given – which increases inflationary forces. The rich tend to save their gifted good fortune from things like the stage 3 tax cuts. The federal government hopes that the huge windfall for the wealthier cohort within Australia will induce positive effects on the economy and shore up their support politically with them by honouring their election promise despite the unpalatable reality for the majority of the population. The capitalist free market system does no favours for the poor, as you can see by the likely economic scenarios sketched out here. What we will see is a lot more Australians being forced to borrow money to meet their financial requirements in 2023/24 and beyond. There will be a credit crisis coming on the horizon with interest rates rising and more regulatory pressures on the banking and finance sector since the Royal Commission.

“If anything, taxes for the lower and middle class and maybe even the upper middle class should even probably be cut further. But I think that people at the high end – people like myself – should be paying a lot more in taxes. We have it better than we’ve ever had it.”??- Warren Buffett

Weary Australians who have been battered by a pandemic and recent natural disasters now face an economic crisis. Their wages no longer have the purchasing power that they did when these bushfires, floods, and the pandemic eventuated. Rising cost of living pressures from rampant inflation are eating away at any savings. Wages have not risen in years and the Reserve Bank is actively discouraging any wage rises within the economy. Power prices are only going to go up, perhaps by 35% in 2023 and beyond, according to economists. The war in Ukraine shows no signs of abating anytime soon and the price of freedom is forever getting higher in economic terms. The effects of global warming are increasing if these floods and bushfires are anything to go by. The future does not look bright by any measure, not in the medium term. More Australians will be forced to access credit to help them get by.

Get Credit Ready Now in Preparation For What Is Coming

Your credit rating file is about to get a workout, so it pays to get credit ready in advance. The storm is coming folks. Ensure that your credit file is correct by checking it out. Mistakes are made on credit ratings because the people who do it are only human after all. You may have errors and misleading information on your credit file. If you have never examined it or checked it recently - how would you know. It is free to request your credit file every 3 months from each of the credit bureaus.

Illion Ph. 1300 734 806

Experian Ph. 1300 783 684

Equifax Ph. 138 332

If you find an incorrect listing or detail, you can contact the company concerned and the credit agency to rectify it. You can also engage a credit law expert to assist you in any credit file listing dispute you may have. A trained pair of eyes can, often, see things that you might miss. Fees are charged on a No Win No Fee basis. There are things that can be done to prevent negative information appearing on a credit file. Credit repair can be achieved via a lawyer who understands credit reporting law in Australia. Credit reporting is governed by The Privacy Act 1988 (Cth) in this country. Experience and expertise can mean the difference between getting you credit ready and really hard times ahead. Understanding the timeframes involved in negative listings on your credit report is another important factor in making things work in the credit world.

History of Tax in Australia & Tax Reform

It would probably be fair to say that most people would like to pay less tax. Traditionally, right wing parties and governments boast of being lower taxing on their supporters and citizens. Taxes pay for the social services provided by governments in western democracies. The obvious irony is that wealthier people can afford to pay for the services provided by governments in more socialist leaning administrations. Private schools in Australia are a good example of this, although, taxpayers fund these considerably in addition to the private fees paid by parents. Medicare and the free health system in Australia is funded by taxpayers. The fact that Medicare is being rorted annually to the tune of $8 billion by health practitioners and corporate heath entities, according to recent allegations by the ABC, The Age and The SMH newspapers is another interesting layer to consider. Australians would like to pay less tax but many also want top notch social services provided by their governments. The recent pandemic saw a sharp focus on the federal government’s inadequacies, when it came, especially, to aged care services in Australia. Another Royal Commission resulted after the many deaths and poor health crises management in this sector were revealed.

Australians paid just 5% of GDP prior to the First World War and this grew to around 11% by the start of the Second World War. By the conclusion of WW2 the tax ratio had risen to 22% of GDP. Wars are very expensive things, as we can see today by the growing demand for a seemingly endless supply of weapons to Ukraine in the battle against the Russian invasion of that nation. In Australia, at the end of WW2 a number of social programs were introduced for veterans and their families. In 1963-64 the tax take was around 18% of GDP but this increased substantially in the Whitlam era in the 1970s, as the ALP introduced many of the ground breaking social programs we enjoy today - like Medicare. As of 2005, Australia had the eighth lowest tax to GDP ratio of 30 OECD countries. Prior to the introduction of the GST in 2000 direct income taxes were the primary means of raising tax revenue for the government. One of the reasons why we have so many disparate taxes in Australia is the battle between state and federal governments following federation to fund their administrations. Land taxes were introduced by state governments to bolster their coffers. Payroll taxes are another state government revenue source. Income tax is a federally controlled taxation, as is company tax. The GST revenue is split up amongst the states as payment to run their administrations. (Reinhardt, September 2005) There are continual calls to increase the GST from 10% to 15% or higher. Also, food was left off the original GST list because of lobbying by social welfare advocates and taxation reformers would like to see that anomaly removed. The tax to GDP ratio had been arbitrarily capped at 23.9%?by the previous federal government, this, however, according to former secretary to the treasury?Ken Henry, must be increased to meet the challenges of the current and coming economic crises. Australia faces a rapidly shrinking tax revenue pool, which is unable at the current level to meet the demands for better social services for all Australians. (Duke, 22 September 2021).

How Do You Feel About Tax Cuts For Wealthy Australians?

The Guardian newspaper ran a poll on this very question and the results were interesting. Obviously, many of the respondents, if Guardian readers, could be categorised as left leaning, and so like all polls must be taken with?a grain of salt.

To what extent do you agree or disagree with the following statements about the changes to the tax system?

- graphic from Lewis, 18th October 2022

The catch 22, however, was revealed when respondents went on to indicate that promises made by the Albanese government prior to the election should be honoured. Integrity has been a focus for Anthony Albanese and I cannot see him breaking a promise here. I predict that the stage 3 tax cuts may be amended in some way, perhaps next year, to reduce their heavy cost on the public purse. We may be in the softening up phase at the moment with all this speculation about their blown out expense to future budgets. Things are likely to worsen in financial terms for Australians and their appetite for largesse for the rich may turn sour in the meantime.

Tax cuts for the rich: The stage 3 tax cuts, inflation, recession, and the coming credit crisis in Australia will heighten the focus on the kind of nation we want to live in. I think that our experience of the Coronavirus pandemic has changed Australia and Australians. An economic storm is coming and we will all be challenged to not only survive it but ensure our financial system treats everyone with fairness and compassion. We will need to be credit ready if we are to utilise the financial services available to optimal?satisfaction and for best results.

References

Australia Institute, The arbitrary 23.9 percent tax revenue to GDP figure, April 2018, Viewed 24th October 2022.

Duke Jennifer, Ken Henry hits out at tax system ‘not fit for service’, SMH, 22 September 2021, Viewed 24th October 2022.

Lewis Peter, Following its Faustian pact to keep the stage-three tax cuts, Labor should stick with the fable and find salvation, The Guardian, 18 October 2022, Viewed 23rd October 2022.

Martin Sarah, Labor attacked by former RBA governor Bernie Fraser for sticking to ‘dodgy’ stage-three tax cuts, The Guardian, 6 October 2022, Viewed 23rd October 2022.

National Debt Helpline, What are the stage 3 tax cuts? Why wont they fix bracket creep? As seen on ABC 6 October 2022, Viewed 24th October 2022.

The Business, Malcolm Turnbull, an architect of stage 3 tax cuts, still backs them, despite higher costs, ABC News, 21 October 2022, Viewed 23rd October 2022.

Remeikis Amy, Growing number of Australians want the stage-three tax cuts scrapped, poll shows, The Guardian, 9 October 2022, Viewed 23rd October 2022.

Reinhardt Sam & Steel Lee, A brief history of Australia’s tax system, The Treasury, Australian Government, 4 September 2006, Viewed 24th October 2022.

Trading Economics, Inflation Rate, https://tradingeconomics.com/country-list/inflation-rate Viewed 24th October 2022.