Progressive think tanks say Labor has entered 'fantasy land, with Coalition in tax cuts

Both the Grattan Institute and the Australia Institute were left stunned by Labor's decision to ditch major economic reforms it pledged at the last election.

The opposition by both groups to the stage three cuts is in despite of a chorus of economists believing the biggest change to the taxation system since the implementation of the GST will boost economic growth.

On Monday, Labor formally announced it would back the Morrison government's stage three tax cuts and would not propose changes to current negative gearing settings.

Labor also confirmed it would dump a pledge to halve the 50 per cent capital gains tax deduction.

Chief executive of the Grattan Institute, Danielle Wood said "both sides of politics are now living in a fantasy land" and would create "significant long term structural budget challenges".

"They're both saying that we're going to cut income taxes significantly," she said. "We're not going to touch taxes, on investments and capital, yet we're going to deliver higher spending. In a world where an ageing population is increasing our cost pressures and reducing our revenue base. You can't square a circle on those things. And we've got both sides of politics essentially pretending that they can. And that means, at some point, difficult decisions have to come. They're not being upfront about those decisions."

Party leader Anthony Albanese and shadow treasurer Jim Chalmers confirmed the changes in a joint statement.

"Labor is providing certainty and clarity to Australian working families after a difficult two years for our country and the world," they said. "Our focus is on making sure Australia emerges from this crisis stronger and more resilient - with an economy that works for working families not the other way around."

Tax cuts putting workers earning between $45,000 and $200,000 in the same income tax bracket have been legislated to start in mid-2024.

There had been debate within the party over whether to repeal the tax cuts which are estimated to cost $137 billion this decade.

Senior economist at the Australia Institute, Matt Grudnoff said politics got in the way of good policy, claiming the tax cuts would only make income inequality worse.

"The benefits of the stage three income tax cuts overwhelmingly flow to Australia's highest income earners," Mr Grudnoff said.

"Australia Institute research shows the top 10 per cent of income earners get over half the benefit, while the top 20 per cent receive over 70 per cent of the benefit."

Mr Grudnoff noted the level of taxation in Australia is light compared to other OECD nations.

"With inequality in Australia only getting worse, we need a debate and better policies about taxing wealth properly and reducing inequality rather than exacerbating it," he said.

Westpac chief economist Bill Evans believes the change would likely boost productivity and participation.

Mr Evans said the main impact of the cuts would raise incentives for workers in the economy and help with overall growth.

"We need productivity and participation to get growth up, particularly given the shock we are getting on population growth," he said.

"I think it ticks a lot of boxes and by the time it comes around it won't be that controversial and now with both parties aligned and legislation through, we can at least look forward to it."

Labor has instead flagged proposing new measures to force multinational companies to pay more tax in Australia.

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