Prime Minister Anthony Albanese has confirmed the ‘Stage 3’ tax cuts will still be introduced from July.
The ‘Stage 3’ cuts mean people with an annual income of between $45,000 and $200,000 will be taxed at the same rate from 1 July.
Everyone earning above $45,000 will receive a tax cut, but it will benefit higher-income earners the most.
Some economists have warned the policy could further fuel inflation.
First, how does income tax work?
You pay no tax on the first $18,200 you earn in a year. Any dollar you earn above that gets taxed, starting at a rate of 19% but eventually reaching 45% for every dollar earned over $180,000.
Currently, incomes between $45,000 and $120,000 are taxed at 32.5%.
Income between $120,000 and $180,000 is taxed at 37%, and income above $180,000 is taxed at 45%.
This means people who earn more, pay more tax (although this is not always true in practice because of deductions and other exceptions). For this reason, our income tax system is called ‘progressive’, because you pay progressively more as you earn more.
What are stage 3 tax cuts?
The Stage 3 cuts will reduce the tax rate on annual earnings between $45,000 and $200,000.
Under the Stage 3 changes, a single tax rate of 30% will instead apply between $45,000 and $200,000.
The Stage 3 tax cuts will have the biggest impact on high-income earners who could see their taxes drop by several thousands of dollars. Nothing will change for people who earn less than $45k a year.
Labor’s commitment
The previous Coalition Government announced a three-stage plan to cut taxes in 2018 and 2019. Labor voted for the tax cuts in Parliament and promised to keep them in place if elected.
Since the 2022 Election, the Labor Government has faced increasing pressure to keep the tax cuts. This week, Shadow Treasurer Angus Taylor urged the Government to make an “unambiguous commitment” to the cuts.
During a radio interview yesterday, Albanese confirmed the “tax cuts will happen in July”.
Inflation concerns
Many economists believe giving more money to high-income earners could drive up spending, causing prices to increase due to higher demand.
Independent analysis from policy think tank The Australia Institute warned: “Handing out a quarter of a trillion in tax cuts to high income earners, during a time of already high inflation, is only going to make inflation worse”.
