Federal Governments Tax Cuts Summary 2009

THE Rudd Government is carrying generous personal tax cuts to high-income earners on more than $100,000 a year that it may now regret, as the search for budget savings forces it to consider giving with one hand and taking back with the other.

The lopsided tax cuts, due from July 1, are the legacy of the last federal election campaign and provide just $5.77 a week to lower-and middle-income earners on between $35,000 and $60,000 a year, but almost double that amount, $10.58 a week, for workers on $100,000 and more than seven times as much, $41.35 a week, for those on $180,000.

Labor has no intention of reneging on its legislated tax cuts. But the heavy skew towards high-income earners increases the likelihood these people will bear the brunt of savings elsewhere to help return the budget to surplus after the recession ends.

Labor has signaled its definition of a high-income earner begins at $100,000 for a single worker and $150,000 for a family. These are the thresholds beyond which no money was paid from the Rudd Government’s first two stimulus packages. They are expected to inform any means tests that will be announced in the budget on May 12.

Brenton and Kim Kemp would hardly classify themselves as “wealthy” and would laugh at the suggestion they may be “rich”.

Mr Kemp, a computer systems incident manager, said he made about $110,000, while Ms Kemp, a legal projects officer who has been on maternity leave this year, usually makes about $70,000.

But their status shifts from elite to working family depending on the payment.

While the Kemps did not benefit from Kevin Rudd’s Christmas bonus of $1000-per-child last December, and would have missed out on the Baby Bonus had five-month-old son Adam been born after January 1 this year, Ms Kemp was eligible for the Prime Minister’s $950 payout to individual taxpayers. “I would like the Government to be more consistent,” she said. “I think they really need to reassess what they think a high income is.”

The dilemma for the Government is whether to offset the coming tax cuts fully through claw backs elsewhere, or leave the recipients slightly ahead in the long-run. In either case, ministers would be aware that soaking high-income earners cannot, by itself, return the budget to surplus. The cost of the tax cuts going to people on more than $100,000 is relatively small in fiscal terms: less than $2 billion a year.

The Government does not want middle-income families to lose money - especially when their tax cut on July 1 is so small.

It may bring forward the tax cut from July 1 next year to give those in the middle a better deal.

Although there has been speculation Labor may place a means test on the Howard government’s Medicare safety net, or even its own childcare rebate, these measures would not yield more than $2billion in total.

The biggest bang for Labor’s buck would come from superannuation. The Henry review has already noted the top 5 per cent of taxpayers receive 37 per cent of the tax breaks paid on the contributions made to super. At the other end of the spectrum, about 2.5 million workers on less than $35,000 a year receive no tax concession because their contributions are taxed at their marginal tax rate: 15 per cent.

If Labor were to target the super of high-income earners, it would want to use some of the savings to give concessions where they presently don’t exist: to lower-income full-time workers and to part-time workers. This, in turn, would reduce the money available to wind back the budget deficit.

The question the Government would need to weigh is how a change in tax concessions would affect the incentive to save.