AARON PATRICK: Let’s finally tell the truth. Tax cuts are not cutting taxes

If you have been listening to Treasurer Jim Chalmers the past couple of months, you are likely to have heard him boast of delivering “five income tax cuts in three different ways” to working Australians.

What he won’t admit is those tax cuts have not reduced taxes. The average rate of income tax workers pay has risen since the Labor Party took power in 2022 and is heading to the highest level ever, according to the Parliamentary Budget Office, an independent agency that published an Budget analysis on Tuesday.

That’s because the “tax cuts” are so small they don’t compensate for the effects of inflation, which pushes thousands of Australians each year up the tax scales, a phenomenon known as bracket creep.

The finding is so important it bears repeating another way: in a decade’s time, the average worker will lose 28.6 per cent of their wages in taxes, up from around 21 per cent a decade ago and 15 per cent in the 1960s.

Behind the dry figures is real damage to what used to be one of the world’s most prosperous nations. Parents who are unable to help their children buy their first homes. Doctors who cut back on working hours because they lose almost half their pay to the government. Entrepreneurs who can’t afford to hire extra staff because wages bills are high.

What is this taxation being used for? Under Dr Chalmers and Anthony Albanese, an expensive and historic expansion of government has taken place. The extra spending includes wage subsidies for white-collar workers, corporate bail outs for heavy industry, loan reductions for university students and increases in welfare.

The combination of rising spending and automatic tax increases creates the central challenge of the Albanese Government. As the Parliamentary Budget Office concludes, Dr Chalmers’ 2035 Budget surplus target cannot be reached unless average taxes continue to rise and the National Disability Insurance Scheme stops growing. The latter is hard. The former politically impossible.

While most Australians may not care about balancing the government’s books next decade, among the influential world of Budget pundits Dr Chalmers’ projection is a central test of his professional competence.

Unrealistic assumption

At the same time, allowing average tax rates to rise to the highest level in history would be politically devastating for the government and Dr Chalmers.

That’s why economists such as Saul Eslake predict personal income cuts in coming years, making the surplus harder to achieve. “A thylacine will come and camp on my front lawn before they decide not to deliver tax cuts,” he said, referring to the extinct Tasmanian tiger.

The Parliamentary Budget Office agrees. “In policy areas such as personal income tax, this assumption is unrealistic as it effectively assumes that the Government will not provide any future personal income tax cuts for a decade,” it says.

Will they be real tax cuts, or merely cloaks for the convenient effects of inflation on tax revenue?

Unless the government suddenly decides it believes in a smaller public service, less welfare and genuinely lower taxes, the outlook for taxpayers is not promising.

Both the Stage 2 and Stage 3 tax cuts — the first from the Coalition, the second from Labor — came into effect just as average tax rates went up.

A chart on page 30 of the Parliamentary Budget Office report shows they weren’t real tax reductions. They were political devices to fool Australians into believing their taxes weren’t going up.

The exposure of these Budget tricks, not for the first time, should shift the political debate. The tax-cut deception should stop, not just for the benefit of working Australians but out of respect for integrity in politics.

A solution

Clearly most voters have lost trust in the major parties, as demonstrated by opinion polls that deliver voting-intention figures under 30 per cent week after week for the Labor Party and Coalition.

Even though he hasn’t made much of the idea, Liberal leader Angus Taylor proposed a solution two months ago.

The two lowest tax brackets would start rising with inflation from 2028-29, he said in his Budget-in-reply speech. The top two brackets would go up from 2031-32.

Veteran Budget analyst Chris Richardson estimated the policy would “cost” the Budget about $12 billion a year. Another way of looking at the plan is that it could save Australians $12 billion in annual tax increases.

Would this require some tough decisions about government spending? Of course. But that is what voters elect politicians to do: make difficult calls for the benefit of all, rather than engage in an endless cycle of pretending taxes are falling when they are not.