Up to 700,000 middle income Australians will face a higher effective marginal tax rate for the next three years at an annual cost to the economy of $500 million under the joint plan of the Coalition and Labor for short-term tax relief.
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Special analysis of the planned super-sized low and middle income tax offset (LMITO), unveiled by Treasurer Josh Frydenberg in this month's budget which is being matched by the ALP, shows a design feature will drive middle income earners into paying a 40 per cent effective tax rate.
Steven Hamilton, a visiting scholar to the Australian National University's tax and transfer policy institute who is also a former Treasury official, said someone on $126,000 faced a reduction of $750 a year in their taxable income under the current plan.
Facing calls for tax relief and a campaign around low wages growth from Labor, Mr Frydenberg announced the LMITO would be doubled from July 1 for people earning between $48,000 and $90,000.
After $90,000, where the 37 per cent tax rate begins, the $1080 offset is reduced by 3 cents for every dollar of income a person earns until it is exhausted at $126,000. It means for every dollar a person earns above $90,000 up until $126,000 they pay an effective tax rate of 40 per cent.
Dr Hamilton said like the problem faced by lower income earners who lost welfare entitlements as they took on extra hours of work, middle income earners would be snared by the proposed LMITO.
He said while the 3 cents may not appear much, it equated to an average reduction of 0.6 per cent in taxable income. For a person earning $126,000 a year that was $750.
"If we assume the average affected person earns in the middle of the relevant range, that implies an aggregate reduction in taxable income of almost half a billion dollars a year from the 3 percentage point tax increase," he said.
"That means around $300 million less in consumption and saving and around $200 million less in income tax revenue, all because of LMITO. That half a billion per year is the real, measurable, and unavoidable cost of targeting the Coalition's tax break."
Dr Hamilton said it was bizarre that while the Coalition was promising to abolish the 37 per cent rate because it "saps incentive", it was lifting that rate to 40 per cent for a large number of people.
He said the higher tax rate lowered the benefit of a worker for earning more income who then may respond by not taking on overtime or reducing the number of hours they worked.
"Secondary earners, often women returning to work after maternity leave, are particularly prone to that kind of response," he said.
"It could involve claiming more deductions to put a brake on your taxable income."
Tax and transfer experts agreed with Dr Hamilton's analysis, saying it was in line with their own expectations of how the LMITO would work in the short term before the Coalition's long term plan to increase the threshold for the 32.5 per cent tax rate from $90,000 to $120,000 in 2022-23.
Mr Frydenberg, while not disputing the analysis, said the Coalition was focused on its long-term tax plan.
"We're delivering long-term structural reform that will remove the 37 cent tax bracket and eliminate bracket creep for average income earners. This means that 94 per cent of taxpayers will pay no more than 30 cents in the dollar," he said.
Shadow treasurer Chris Bowen also would not be drawn directly on Dr Hamilton's work, saying Labor was focused on tax relief for low and middle income earners.
"The Liberals' never-never tax plan delivers a $11,000 tax cut for millionaires, more proof that the government's pretence of tax reform is really just an excuse to look after the top end of town," he said.
- SMH/The Age
