Income tax will continue to increase as a proportion of disposable household income over the next decade – and as a drag on consumption – despite legislated tax cuts worth $302 billion over the same period.
An analysis by Macquarie Securities economists shows that without the tax cuts, income tax would jump from about 16 per cent of household income to almost 20 per cent by the end of next decade.
With the tax cuts, the percentage will increase to a little more than 17 per cent, but income tax would still weigh on consumption.
The analysis also shows income tax has proven to be the biggest drag on disposable income over the past decade.
It found over the past eight years, income tax paid as a percentage of household income had risen by more than 4 percentage points.
Over the same period, net interest rate payments declined as a proportion of disposable income by about 2.5 points.
The net interest rate is interest paid on debt less that received on deposits.
The figures followed a concerted campaign by the government to put pressure on the banks intopassing on the recent interest rate cuts in fullto stimulate the economy. But they suggest income taxes are having a bigger effect on spending than interest rates on mortgages.
The analysis of the past eight years encompassed the period from 2011 to the end of the June quarter this year, meaning it did not take into account the stage one income tax cuts, which began on July 1 and will be rolled out in three phases. Stage two begins on July 1, 2022, and stage three on July 1, 2024.
In total, the three phases of tax cuts are worth $302 billion over a decade.
Nor did the analysis incorporate the interest rate cuts by the Reserve Bank of Australia in July and October, which totalled 50 basis points.
Looking at the 10 years from 2019-20, Macquarie Securities economist Justin Fabo said the story did not change even after taking the tax cuts and the most recent rate cuts into account.
For example, the first phase of tax cuts, which began on July 1, are worth about $8 billion – just 0.6 per cent of household consumption.
“It’s not big. It doesn’t shift the story,” he said.
The new analysis shows that even when stages two and three of the tax cuts are rolled out, income tax as a proportion of household income will continue to increase, albeit at a slower rate than without the tax cuts.