The Stage 3 tax cuts explained: Who benefits the most, and why is the government rethinking them?

Tradies, hairdressers, nurses and politicians could miss out on a tax break if the federal government backflips on, or rethinks, the scheduled Stage 3 tax cuts, as the Treasurer flags “difficult decisions” must be made in this month’s federal budget in light of a looming global recession.

The Coalition-era Stage 3 tax cuts were designed prior to the pandemic in 2018. Labor vowed to implement the changes during this year’s election but there is a growing chorus of criticism that we can no longer afford the $243 billion policy.

The former governor of the Reserve Bank Bernie Fraser yesterday called for the “very dodgy” cuts to be repealed, saying the promise was hardly an “unbreakable one in current circumstances” with a gloomy fiscal outlook and climbing key costs in the budget, such as the National Disability Insurance Scheme.

“Many of those billions of dollars [of Stage 3] will flow to really relatively well-off Australians, rather than become part of the critical funding that’s required to fund the commendable programs that Labor has in mind that will help and promote the wellbeing of all Australians,” Fraser said.

How the Stage 3 tax cuts would work

Under the Stage 3 tax cut plan – which is poised to begin in the 2024 financial year – the 37% marginal income tax rate would be axed, and everyone earning between $45,000 and $200,000 will pay a tax rate of 30%, benefiting about 78% of taxpayers on a sliding scale.

In dollar terms, workers on $60,000 would pay a measly $400 less tax a year (like hairdressers). Those on $70,000 would pay $620 less tax a year (like tradies), those on $80,000 would pay $900 less tax a year (like a nurse), those on $90,000 would pay $1,120 less tax a year, and those on $100,000 would pay $1,370 less tax a year.

A worker on $200,000 a year will receive a whopping $9000 tax cut. This category includes all members of Parliament, who earn a base annual salary of $211,250.

But it’s men who earn over $180,000 that are set to benefit the most from the Stage 3 tax cuts, according to an analysis prepared by the independent Parliamentary Budget Office and commissioned by the Greens, who are calling for the plan to be axed.

Male workers will save an estimated $160.6 billion, the analysis found, while female workers will save nearly half that $82.9 billion as the gender pay gap in Australia sees higher wages land in the pocket of the former cohort.

Chalmers signalling a revision

Treasurer Jim Chalmers has not yet confirmed the fate of the slated tax cuts but it seems increasingly likely the policy will at the very least be amended when he hands down his first budget on the 25th of this month.

“The fiscal position we find ourselves in means that we will have to make some difficult decisions with this budget. Difficult decisions for difficult times,” he said this week.

“The right calls for the right reasons, following the responsible path; not the path of least resistance. We must be serious about rebuilding our budget buffers – particularly given the deteriorating global outlook.”

But opposition treasury spokesperson Angus Taylor called any move to rethink the cuts a “war on aspiration” in Australia, arguing it wasn’t only the top end of town that would benefit from the tax break.

“These are hardworking, aspirational Australians like teachers, hairdressers and tradies, who are just trying to get on with paying off their homes, raising their families and contributing to our economy,” Taylor said.

Independent Kylea Tink argued that it did Australia a “disservice” to describe people earning $120,000 a year as “rich”.

“These people in this price bracket are actually the people who [have] usually got heavy mortgages, they’re paying to get their kids in childcare centres, they’re desperately trying to juggle all sorts of other fees and costs,” Tink said.

‘Class warfare’, Coalition claims

Deputy Opposition Leader Sussan Ley agreed, saying the argument that the cuts are benefitting the rich would be a hard pill to swallow in major cities like Sydney, where the cost of living double that of Melbourne (and 15th highest worldwide).

“Labor wants to disproportionately focus on and demonise those earning a good income,” Ley, who is also shadow spokesperson for Industry, Skills and Training, said.

“It’s a return to the class war rhetoric we saw in 2019. And if they want to stand around in Sydney, where I’m standing now, and tell people that they earn too much to deserve the tax relief they were promised … they should say that.”

Opposition Leader Peter Dutton warned unwinding the cuts could disrupt the investment or mortgage plans of Australians who were banking on the tax break in 2024.

“Their position couldn’t be any clearer and there are lots of workers who will have taken out home loans over the last couple of years knowing that ‘look, interest rates are low, there’s a likelihood that they’re going to bump up and I know that I’m going to get a tax cut in 2024 and this will help me meet my mortgage repayments’,” Dutton told radio station 2GB.

“And they’ve made investment decisions on that basis because of the certainty provided by the Prime Minister’s own words.”

But Skills Minister Brendan O’Connor told ABC radio the whole conversation is premature anyway.

“I think we need to consider these things, but let’s remember that Stage 3 tax cuts are not until almost two years away and we have to consider the immediate matters before us and deal with them now.”