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Australia’s Prime Minister Plans Changes to Tax Cuts Despite Election Pledge

(Bloomberg) -- Australia’s Prime Minister Anthony Albanese plans to scale back tax cuts for the nation’s wealthy in favor of low- and middle-income earners, local media reported, a politically risky move after he pledged ahead of the 2022 election to keep the legislated package unchanged.

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Albanese’s cabinet signed off on the changes to the legislation, known as the Stage 3 tax cuts, following a meeting on Tuesday, according to the Australian Financial Review. The new legislation will be put to the center-left Labor party’s lawmakers ahead of an announcement by the prime minister.

“I’ll be taking a proposal on economic policy to the party room this afternoon,” Albanese told reporters in Canberra on Wednesday, responding to questions on the tax changes. “This proposal will be all about supporting middle Australia. We know that there are cost of living pressures on middle Australia.”

The Stage 3 tax cuts were legislated under the previous center-right Coalition government to begin in July 2024, the third leg of a suite of changes announced in 2018. Under the original plan, Australia’s 32.5% and 37% brackets would be scrapped in favor of a uniform 30% rate for incomes between A$45,000 ($30,000) and A$200,000.

According to local media, Albanese’s new policy will see the 37% tax rate retained for Australians earning more than A$135,000. The top tax rate of 45% will kick in at A$190,000, higher than at present but lower than in the original package.

Economists at Goldman Sachs Group Inc. wrote in a note to clients on Wednesday that reported changes are broadly “budget neutral” while posing “upside risks” to their economic growth forecasts, given low-income households typically have a higher marginal propensity to consume.

While the changes may appeal to Australia’s lower-income voters, who have struggled with high inflation and rapid-fire interest-rate increases, they expose Albanese to charges of breaking an election promise.

The tax cuts have been controversial among Australian progressives, who viewed them as disproportionately favoring higher income earners. Proponents argue the first two stages of tax reform focused on lower-income earners.

Speaking to Sky News on Wednesday, Shadow Treasurer Angus Taylor called potential changes to the Stage 3 tax cuts the “mother of all broken promises.” Australian business groups also issued strongly-worded statements, warning the government against any changes.

But Richard Dennis, executive director at the progressive Australian Institute think tank, said the changes were “the right thing to do” and that the political damage was likely to be limited.

“Is it politically deadly for the prime minister to give the vast majority of Australians far bigger tax cuts” than previously foreshadowed, he asked rhetorically in an interview with Australian Broadcasting Corp.

--With assistance from Swati Pandey.

(Adds comment from Goldman Sachs in paragraph sixth.)

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