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Stage 3 tax cuts will impact the take-home pay of many Australians and the broader economy. What does this mean for taxpayers in the long run?

The Stage 3 tax cuts, which took effect on 1 July 2024, mark a shift in Australia’s tax landscape. For many Australians, these tax cuts translate into an increase in net wages, providing financial relief against the backdrop of ongoing cost-of-living pressures.  

The broader implications of these cuts extend beyond the immediate boost to take-home pay, prompting important questions about their long-term effects on the economy. 

“Tax cut relief touches all taxpayers, providing them with more income to manage during this cost-of-living crisis,” says Associate Professor Dale Boccabella, a tax expert from UNSW Business School.

“The critical elements of the Stage 3 tax cuts involve reducing tax rates for income brackets and adjusting the taxable income bands to which these rates apply.  

“The average yearly income of Australians is said to be roughly ~$100,000. A person with a taxable income of $100,000 will be $2,180 better off because of the Stage 3 tax cuts. This is about $42 per week,” says A/Prof. Boccabella.  

The cuts aim to provide tax relief, but what are the long-term benefits, and how will this impact consumer spending and the overall economic landscape?

What impact do the tax cuts have on inflation and the broader economic landscape? 

The Stage 3 tax cuts’ immediate effect is an increase in income for many Australians. This additional income could lead to higher spending, savings, or both.

“Everyone likes getting more income,” says Dr Nalini Prasad, from the School of Economics, UNSW Business School.  

Dr Prasad says that the impact on inflation and the cash rate largely depends on how taxpayers use their increased take-home pay.  

“The increased average take-home pay is $42 per week. If individuals decide to spend most of the increase in their income from the tax cut, then this will be inflationary and put upward pressure on the cash rate.  

“This option is concerning as the current period shows that the economy is struggling to produce as much goods as people demand,” she says. 

Dr Prasad explained that, on the other hand, if most individuals decide to save money from tax cuts by increasing their mortgage repayments, “then the effect on inflation will be muted.” 

If the economy experienced higher inflation due to increased spending from tax cut savings, Dr Prasad explained that she would expect small increases in economic growth.

“Given that businesses are struggling to keep up with current demand, most are already producing close to their capacity. Higher inflation tends to lead to higher wages. This is of particular concern to the services sector since wages are a big part of the costs for these businesses,” she says.

Long-term tax benefits

The Stage 3 tax cuts also offer several long-term benefits for taxpayers and the broader economy.

Addressing bracket creep is a key advantage. Bracket creep occurs when inflation pushes people into higher tax brackets, causing them to pay more tax even though their real income hasn’t increased.  

“The cuts help taxpayers by adjusting for inflation, so they aren’t unfairly pushed into higher tax brackets just because their nominal income has gone up,” says A/Prof. Boccabella.  

While A/Prof. Boccabella explains that tax cuts can help alleviate symptoms of bracket creep, he says this isn’t an ideal or comprehensive solution to fixing the entire bracket creep issue. 

“A better approach would be to use an objective method like indexing to adjust tax brackets automatically,” he says. 

The tax cuts also aim to maintain the tax system’s progressivity, ensuring that higher earners continue to pay a greater percentage of their income in taxes compared to lower earners.

“Compared to the Coalition’s Stage 3 proposal, which had a 30% rate between $45,000 and $200,000, the current system maintains progressivity, with higher earners paying a higher percentage of their income in taxes. 

“A progressive tax system can be viewed as more effective for wealth redistribution and achieving social equity,” says A/Prof. Boccabella. 

Long-term economic and tax outlook 

Dr Prasad explains that while tax cuts can stimulate investment and growth in the long-term, their success depends on resolving current inflation issues and increasing the economy’s productive capacity. 

“In the longer term, if the economy builds more productive capacity, then I’d expect more investment to occur from the tax cuts, but we need to resolve the inflationary problems in the short-term first,” says Dr Prasad.

“For the economy to benefit fully from these tax cuts, productive capacity needs to be increased. Otherwise, the immediate effect might be limited to higher inflation without significant gains in economic growth.”

From a tax perspective, A/Prof. Boccabella says the cuts invariably lead to reduced government revenue, which can affect the budget deficit or surplus.

“Without corresponding reductions in government spending or increases in other forms of revenue, the budget deficit may widen. This impact could constrain the government’s ability to fund public services and social programs in the long run.”