The first announcement of the federal election is out, and it’s a juicy big package of tax cuts from the Coalition. My guess is that much of the commentary will focus on the inflationary impact of the cuts when the RBA board meets 6 Nov, but to me that’s a second-order issue. More important is the distribution of these tax cuts across the income spectrum.
As I’ve pointed out before, theÂ tax packages announced by theÂ Coalition in the 2005 and 2006 budgets wereÂ highly regressive – largely because the government is unwilling to countenance negative income taxes (EITCs); the policy reform favoured by other developed countries to move people from welfare into work.Â Tax cuts don’t have to be regressive if they include EITCs.Â (For more of my EITC-spruiking, see the third part of this essay.)
To see how the new Howard-Costello tax cuts would bite, take two examples.Â If you’re a federal MP (base salary $127,060), then your total tax savings from 1 July 2007 to 2010-11 are around $3800. If you’re on the minimum wage ($27,150 for a full-time minimum wage worker), then your total tax savings over the same period are about $1280. A spending plan this regressive would be met with howls of outrage.
If the priority is moving low-skill workers into the labour force, does it really make sense toÂ give three times as much to federal MPs as minimum wage workers?
PS. Looking again at the tax tables, I see that these tax cuts are certainly more regressive than the 2006 ones.