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Stage 3 tax cuts and the Battle for Middle Australia. But who is that exactly?

by Harry Chemay | Jan 31, 2024 | Finance & Tax, Latest Posts

Prime Minister Anthony Albanese announced last week that the previous government’s Stage 3 tax cuts needed to be revised to give greater cost-of-living relief to middle-income earners. Harry Chemay cuts through the rhetoric to find out who they really are.

At his National Press Club address, the PM said the changes were “fairly and squarely focussed on middle Australia”, as he outlined the rationale for reducing the benefits, due to flow from 1 July this year to Australia’s highest income earners; those who currently face a marginal tax rate of 45% for every dollar of taxable income above $180,000.

The phrase ‘middle Australia’ was a recurring theme throughout the address, the PM noting that under the proposed revision to the tax scales, an average wage earner on $73,000 per year would be some $1,500 better off than if the stage 3 flattening of the tax scales were to proceed.

The 2018 changes were sold at the time on the basis of tax relief for middle-income earners, with then-Treasurer Scott Morrison stating, “Our personal tax plan is very much anchored around middle incomes, not just now but in the future” after outlining the tax measures in the 2018 Budget.

Taxable income treshold

As proposed by the then Coalition government, and as currently legislated, the income level at which the top marginal tax rate (MTR) applies is scheduled to be lifted above $200,000 effective 1 July 2024, while the 37% MTR is to be removed, a 30% rate to apply instead to taxable incomes between $45,001 and $200,000.

The incumbent Albanese government has now proposed a revision of the stage 3 cuts, reducing the MTR for lower-income earners, and keeping the 37% MTR while reducing the rate at which the 45% MTR kicks to taxable incomes greater than $190,000 per the table below right.

Taxable income treshold new

Selling the 2018 tax cut package

At the time of the May 2018 Budget, the average annual wage was quoted as being around $84,600 per year, with Treasury forecasting a rise to $103,740 by 2024.

These statistics were widely reported in the mainstream media, with the AFR going as far as to say ($): “The chief beneficiaries of the third stage of the government’s income tax cuts will be earning up to $200,000, but they will be classified as middle-income earners by the time the cuts are delivered, new government modelling shows.”

And here we are in 2024, the year to which those statements relate.

So what exactly is the ‘average income’ in Australia now? How could it have been $84,600 in 2018 yet be $73,000 at present? Was it not projected by the Treasury to be around $103,000 now? And how does that square with the AFR’s 2018 take that individuals earning $200,000 in 2024 would be ‘middle-income earners’ but nothing more?

Tax cuts for us! | The West Report

‘Average income’ – a statistical sleight-of-hand

Because of its primacy in the lives of voters, cherry-picking definitions of ‘income’ and ‘earnings’ to suit one’s narrative is a well-trodden path in policy circles. As the saying goes,

If you torture the data long enough, it will confess to anything.

Definitions of income are invariably complicated by taxes. Which, for example, is the appropriate income measure: assessable income (what is earned) or taxable income (after all available deductions are claimed)? On closer inspection, the PM’s reference to $73,000 is a reference to the average current taxable income across all full-time workers.

The complexity increases with higher earnings. The ABS has numerous definitions for earnings, including base average weekly earnings (AWOTE), earnings inclusive of overtime and other monetary benefits, and a host of other factors. Then there are the differences between full and part-time employment, men and women, and differences based on occupation and sector.

For example, the reference to $84,600 being the average wage in 2018 appears to refer to the annualised average weekly earnings for a full-time adult at the time.

And then there’s the concept of ‘average’ itself, which may be anything but the middle ground. It might be a reasonable way to describe the typical height or weight of a population, but that is rarely the best way to describe the typical level of income or wealth. That’s because a relatively small number of individuals often have outsized incomes or wealth compared to the general population, pushing the mean (average) beyond the true middle.

Whenever the average (mean) might be misleading, the median (a value where 50% of observations are less than it and 50% are greater) is a better descriptor of the mid-point. It is, literally and figuratively, the middle ground. And a better statistic to focus on if you really want to know who is indeed ‘average’ in the income or wealth stakes.

The ABS itself confirms this data quirk, noting that “mean earnings are usually higher than the median earnings as relatively small numbers of highly paid employees can skew the mean higher.”

Average vs median earnings since 2018

Heeding the ABS guidance, I set about the task of finding earnings data going back to 2018, then running it forward to the latest available figures, in order to determine if the former government’s projections at the time of proposing its tax cut package did indeed eventuate as forecast some six years later.

I first plotted the annualised equivalent of the ABS’s data on full-time adult total weekly earnings (released twice yearly in May and November) from May 2018 to May 2023.

Against this, I plotted the annualised equivalent of the median full-time adult total weekly earnings (released by the ABS for May 2018, 2021 and 2023).  The results are provided in the chart below:

Full time adult earrnings

The data indicates that the ‘average’ full-time adult worker was earning some $85,847 in May 2018 and that those earnings had risen to $99,221 by May 2023, broadly in line with Treasury’s 2018 forecast for average full-time earnings in 2024.

The median full-time earnings figures were, however, notably lower, rising from $76,076 in May 2018 to $88,920 five years later. Thus, of all adult full-time wage and salary earners in Australia, half earn less than $88,920, and half earn more.

Combining all employees into one number, however, whether average or median, does little to reveal the true earnings of people in differing circumstances.

To overcome this limitation, I analysed the latest ABS earnings release to calculate the median annualised total cash earnings by employment status and gender. The chart below shows the results.

Median annualised earnings

Now, the true differences in Australia’s workforce start to emerge and reveal why statements made by politicians using averages, whether income or earnings, should rarely be taken at face value.

If you are a full-time male employee and earning more than $92,872 at present, you are earning more than half of Australia’s full-time male employees. If you are a full-time female employee earning more than $83,200, you are similarly in the top half of your cohort.

For part-time workers, the median annualised earnings are $32,500 and $36,400 for men and women, respectively. To these individuals, the suggestion that $200,000 might be a middling income in the year 2024 must surely push the bounds of credulity. Except to David Littleproud, of course…

Tall tales vs true tales

Nearly six years on from the release of the 2018 Personal Income Tax Plan package, and then-Treasurer Scott Morrison’s claim that “the real beneficiaries are those who sit in the middle of the pack and either side of it.”

And where exactly is the middle of the pack today? Well, it’s patently clear where it’s not; $200,000. It’s nowhere close to it, with half of all full-time males earning less than $93,000 and half of all full-time females earning less than $84,000. They sit squarely in the 32.5% MTR at present, moving to 30% under the proposed revision to the tax scales.

So perhaps the bigger lesson here is not that politicians will use whatever data best suits their purposes at the time in selling tax changes; but that we, the public, are all too easily and uncritically swayed by these pronouncements.

When it comes to incomes (and wealth even more so), recognising that averages don’t generally represent the ‘middle of the pack’ is your first line of defence against being misled.

It appears to be too much to ask of our politicians that they sell tax changes based on median observations instead of averages.

The flaw of averages is simply too great a temptation not to exploit.

 

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Harry Chemay has more than two decades of experience across both wealth management and institutional asset consulting. An active participant within the wealth and superannuation space, Harry is a regular contributor to investment websites in Australia and overseas, writing on investing and financial planning.

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