The Albanese government's proposal to overhaul the stage three tax cuts has set off a messy political debate.
Labor, the Coalition and the Greens have argued at cross-purposes, trading contradictory claims about the implications of the plan.
Labor has asserted its plan makes everyone a winner – the highest earners will get less than they expected, but "everyone is getting a tax cut".
The Coalition has accused the government of "betraying" higher earners by denying them what they were promised, and warned the plan would make millions "secretly" worse off over time.
And the Greens have suggested the lowest earners are the biggest losers, criticising the government for giving more to "politicians and billionaires" than "the poor".
All three claims are related to the truth, but each only to a fragment of it. In tandem, they are as clear as mud.
But arriving at a clearer understanding of what is being proposed, and what it means, requires wading through a dense thicket of brackets, creeps, rates, thresholds, highs, middles and lows.
Confused? You're entitled to be. Let's demystify.
A quick income tax primer
Australia's income tax system works using a series of income thresholds (or 'brackets') at which different rates of tax apply.
These rates apply to every taxpayer sequentially. That is, everyone pays no tax on their first $18,200, then 19 cents for every dollar between $18,200 and $45,000, and so on.
The thresholds are not automatically adjusted for inflation.
This system is a 'progressive' tax system, which means taxpayers who earn more pay a higher percentage of their total income in tax.
There are further complications – an array of exemptions, deductions and offsets can change how much tax a person pays – but the stage 3 debate is about the rates and thresholds.
Income tax represents 43 per cent of the federal government's total tax take, which is high by international standards, although most countries apply other taxes on social security which Australia does not (it has compulsory super instead).
What was stage 3?
The 'stage 3' tax cuts, were legislated by the Coalition in 2019 and were set to start in July of this year.
Stage 3 would have applied a 30 per cent tax rate between $45,000 and $200,000. In doing so, it would have abolished the 37 per cent tax rate and pushed out the threshold for the top 45 per cent bracket.
Three quarters of this cut would have gone to the top fifth of earners. Those earning above $200,000 would have got the largest benefit, of $9,075 a year, and those earning below $45,000 would have got no benefit.
As its name suggests, stage 3 was the third tranche of tax cuts presented by the Coalition as a package. Stage 1 was temporary. Stage 2 provided a benefit to all taxpayers. It was smallest for those earning under $45,000 ($255 a year) and largest for those earning above $120,000 ($2,565 a year).
What is Labor now proposing?
Labor initially objected to these tax cuts but had repeatedly promised it would not change them. Now, it says a desire to provide cost of living support has changed its mind.
It proposes to keep the 37 per cent rate between $135,000 and $190,000 and cut the bottom rate from 19 per cent to 16 per cent.
The cut to the bottom rate would benefit every taxpayer, by $804 a year for most. The retention of the 37 per cent bracket would increase tax compared to stage 3 for those earning above $135,000.
The combined effect of those two elements means everyone will get a tax cut in the next financial year, but those who earn above $146,000 will be worse off than under stage 3. For the highest earners above $200,000, the benefit is roughly halved from $9,075 to $4,529.
How many people win and how many lose?
This $146,000 'tipping point' offers a simple binary for counting winners and losers.
In 2024-25, roughly 90 per cent of taxpayers will earn below $146,000 and 10 per cent above. That's over 10 million winners and fewer than 1 million losers, a ratio the government hopes will help the electorate forgive its broken promise.
About a quarter of taxpayers will get a tax cut under the Labor plan who would not have under stage three (those who earn below $45,000 but above the tax-free threshold).
Though they have featured heavily in the political debate, those earning over $200,000 represent less than 5 per cent of taxpayers.
What about bracket creep?
But the income tax system doesn't stand still – it creeps.
Because the bracket boundaries are not adjusted for inflation, a taxpayer with the same 'real' (inflation-adjusted) income will pay more tax over time.
This is sometimes framed as people moving into higher brackets, and there is particular focus on how many people will 'end up' in the top bracket.
But since the brackets apply cumulatively, this is not the most meaningful way to measure bracket creep. Economists prefer to track 'average' tax rates, which smooth out the effect of all the brackets and tell us what percentage of a person's total income is paid in tax.
Tax cuts are often framed as compensating taxpayers for bracket creep or 'returning' it to them.
In the absence of political appetite for inflation-adjusted tax brackets, governments of both persuasions have intermittently offered tax cuts to return bracket creep in this way. This somewhat disorderly arrangement has kept average tax rates broadly stable for four decades.
So how do the plans compare on bracket creep?
On the one hand, the Labor plan offers more bracket creep relief to most taxpayers. Within a decade, the bottom 70 per cent of taxpayers will see their average tax rate go up by less than under stage 3.
The government has argued this is an improvement for the most pernicious consequence of bracket creep, which is that it can discourage workers from seeking extra work by eroding their take-home pay. That effect is typically largest for part-time workers, who stand to benefit.
But on the other hand, the Labor plan allows more bracket creep overall than stage 3 — $28 billion more over the next decade, or about 1 per cent of the total income tax take.
Most of this figure is because of the retained 37 per cent bracket. This is what the Coalition is referring to when it says millions of taxpayers will eventually be worse off under the Labor plan.
Caution should be applied to any decade-long figures, since they assume no further tax cuts over that period, which history suggests is unlikely.
Regardless, neither the Labor plan nor stage 3 would have addressed the cause of bracket creep — each represents a deferral of the debate, not a resolution.
What about those who pay no tax?
While Labor and the Coalition have debated the implications of their respective plans for low- middle-and high-income taxpayers, the Greens have focused on those who do not pay tax.
This group is large. About one sixth of the 'taxpayers' file a tax return but in fact pay no tax because they earn below the tax-free threshold. Another 3.5 million adults file no tax return.
It is not straightforward to explain who is in this group.
Firstly, it does include those we might typically think of as 'low income', including workers with low pay and welfare recipients.
By definition, these non-taxpayers are unaffected by tax cuts. But the Greens have argued this makes them 'losers' under both tax plans since they miss out on cost-of-living support.
In its advice to government, Treasury noted many in this cohort had benefited from other cost-of-living measures including energy bill relief and last year's real increase to welfare payments.
Others, including Senator David Pocock and the Australian Council for Social Services, have also called for the government to pair its tax cuts with further welfare increases, and the issue may be revisited in the May budget.
But the 'low-income' category does not just include those of low means. The cohort of non-taxpayers includes retirees, stay-at-home parents, and those of comfortable means who take advantage of tax deductions to minimise their taxable income.
This fact points to the limitations of relying solely on taxpayers in discussions about 'high earners' and 'low earners', and about who is 'well-off'.
The missing piece: housing
In particular, a focus on income ignores wealth.
Wealth, which includes the value of the assets you own, gives a much richer picture of your financial circumstances than the annual snapshot provided by your income. The two measures are strongly related, but not identical.
And perhaps the most important asset for determining how well off someone is in Australia is housing.
Housing may seem tangential to the debate over income tax cuts, but it featured in Treasury's advice to government and reveals a hidden fault line.
The chart below shows financial distress for different income quintiles. While it is clear that those on lower incomes are more likely to be in financial distress, that's not all that's clear.
At all income levels, renters are more likely to be in financial distress than homeowners, and homeowners with mortgages are more likely to be in distress than those who own outright.
Renters in the top quintile, and mortgage-holders in the second-top quintile, are just as likely to be in financial distress as outright owners in the bottom fifth.
In the debate over winners and losers from the stage 3 overhaul, nobody in such distress will feel 'well off', and will continue to be frustrated at their governments.