As I mentioned a few days ago, Treasurer Josh Frydenberg and Prime Minister Scott Morrison recycled three pretty big tax ideas in the 2019 budget, each one originally from the 2018 budget but supercharged, and in one case doubled.
The ideas were:
eventually eliminating the 37% bracket to make the tax system flatter;
upsizing the Low and Middle Income Tax Offset to A$1080; and
increasing the value of business investments that may be written off.
Today I’ll deal with the second: the Low and Middle Income Tax Offset, also known as the LMITO or lamington.
In last year’s budget it was to be worth up to $530 per person, but this year the government intends to more than double that to $1,080. And they’d do so retrospectively, so that by the time people put in their 2019 tax returns, many will get a tax cut more than twice as big as originally expected.
(As it happens, the operative word is “intends”. In budget week Morrison said the Tax Office would be able to make the changes “administratively” without the need for legislation. He didn’t have time to introduce the leglislation and Labor would broadly support it. Last week in its official pre-election overview of the government’s finances, the public service said no. It would need “the relevant legislation to be passed before the increase to the Low and Middle Income Tax Offset can be provided for the 2018-19 financial year”.)
The idea of the lamington
But let’s examine the idea of the lamington anyway because it does have bipartisan support and will become law and part of the tax scales. On one hand, it will deliver a welcome boost to taxpayers on middle and low (but not the lowest) incomes. On the other hand, it will push up a key marginal tax rate and kill incentives in a way the Treasurer hasn’t yet acknowledged.
The offset is a gift of $530 (soon to be $1080) slipped into the tax returns of everyone who earns between $48,000 and $90,000.
People earning more than $90,000 will get less of the offset as their income climbs, up to an income of $125,000 when it the offset will vanish. Low earners will get $200 (soon to be $255), climbing to the maximum of $530 ($1080) as their income climbs from $37,000 to $48,000. People with an income too low to pay tax won’t have any tax to offset, and so will get nothing.
Described in dollar terms as I just have, it’s easy to understand. You can work out the tax cut you’ll get, and the Coaltion has helpfully prepared tables to let you see.
But it is possible to describe the changes in another way, not in dollar terms, but as a new set of marginal rates. And this is where they get interesting, and unattractive.
As a longer-term goal, the Coalition says it wants most taxpayers to pay the same unchanging marginal rate of 30% for all incomes between $45,000 and $200,000. It believes that high marginal rates and frequently changing marginal rates sap incentive.
By 2024 it wants the tax scale to look like this:
Authors: The Conversation