The combination of rising inflation, falling real wages and a progressive income tax system is driving a significant reduction in after-tax income for low-income Australians and in turn a significant increase in inequality in Australia. Low-income workers are suffering after the largest ever fall in real wages. 

This paper proposes a targeted income tax cut for low-income workers by increasing the Low Income Tax Offset (LITO). The LITO is an automatic tax refund, currently capped at $700 per year, which low-income earners receive when they lodge their tax returns. It reveals key beneficiaries would be young people and those in regional areas, with National Party electorates benefiting the most.

Key findings

• Increasing the cap to $3000 would ensure the nation’s lowest-income earners stay ahead of inflation. 
• Those earning between $32,000 and $46,000 would receive a tax cut of more than $2,000 per year.
• While real wages have grown more recently, the Reserve Bank of Australia is now expecting them to fall in 2026. 
• Rural and regional electorates, particularly those currently held by the National Party, would be the largest beneficiaries of proposed reforms to the LITO.
• The analysis shows the cost of increasing the LITO would be $11.98 billion per year. The paper suggests this revenue could be replaced with a gas export tax.