A report analysing cutting the budget repair levy and giving high income earners a tax cut to compensate for bracket creep, as touted by Treasurer Scott Morrison, finds the measure would exacerbate the revenue problem and not deliver growth. 

New polling in the report also showed that the vast majority of Australians were not able to accurately identify their own marginal tax rate. One of the key assumptions justifying the so-called ‘growth-dividend’ is that a decrease in marginal tax rates would change worker behaviour and participation.

Figure 1 – Proportion of people able to identify their marginal tax rate by income level

Source: TAI (2016) Australia Institute Survey – March, 1412 respondents

“The assumptions, upon which the case for cutting income tax rates has been built, are seriously flawed,” Senior Economist at The Australia Institute, Matt Grudnoff said.

“For example, one assumption behind the ‘growth-dividend’ models is that if everyone in a high-income job get a small tax cut, they’ll be inclined go to their employer and demand more hours and more pay.

“But research shows that people don’t even know what their marginal tax rates are.

The study also reviewed the impact of cutting spending on services to deliver tax cuts to the highest income earners, finding evidence that such a policy is likely to reduce economic growth and increase inequality.

“Additionally, we know that high income individuals don’t spend as high a proportion of their income in the community as those on lower incomes, they save a much larger portion.

“So if the government sticks to its claim that any tax cuts will be paid for by service cuts, the net result will take money out of the economy, and hence be anti-growth.

An increase in the 2^nd highest tax threshold to $90,000, together with scrapping the budget repair levy would flow entirely to the 30% on the highest incomes.

“At a time when the Government has a revenue problem, increasing the 2^nd highest tax threshold to $90,000 would put a $1.2 billion hole in the budget in its first year, increasing through forward estimates. Scrapping the budget repair levy will cost an additional $1.5 billion.

“You can put strange assumptions into a model and get all kinds of results out the other end, so it’s important that we question the modelling. When it comes to income tax cuts creating growth, the evidence is extremely weak,” Grudnoff said.