Tax cuts may ‘turbo-charge’ inequality but that’s a price Labor is willing to pay to win Coalition seats

If you are a political tragic, you’ll likely have heard of Emma Dawson. If you are a civilian, allow me to introduce her. Dawson runs Per Capita – a progressive thinktank. Before that she worked for SBS and Telstra. After the corporate gigs, she worked as a policy adviser during the Rudd and Gillard governments.

A few months back, Dawson was asked by Labor party elders whether she would contest the seat of Melbourne at the next federal election – territory that is now a Greens stronghold. Her initial inclination was yes. But because she’s well connected, and can read the play, Dawson saw a significant problem coming down the line.

Labor was about to abandon its opposition to the Morrison government’s stage-three tax cuts, which predominantly benefit higher income earners and which Dawson had strongly criticised. A few days before Anthony Albanese announced Labor’s ultimate landing point, she abandoned the tilt.

The tax decision wasn’t the only factor behind her tactical retreat, but it was certainly one factor.

Related: Tax cuts backed by Labor will give men $2 for every $1 women get, Greens modelling shows

Dawson opposed Labor’s new position on principle, and given the Greens leader (and incumbent member for Melbourne) Adam Bandt was immediately on the attack about Labor’s politically “gutless” decision, the prognosis was obvious. She would enter an already difficult contest with too much weight in her saddlebags.

“I have been a strong and consistent critic of stage three of the Coalition’s tax cuts since they were announced in the 2018 budget,” Dawson told me this week. “They will turbo-charge income inequality and remove significant annual revenue from the federal budget at a time when our focus should be on investing in a better future on the other side of Covid-19.”

Dawson says she remains “strongly of the view” that the election of a majority Labor government is fundamental to making Australia “a more equal, caring and sustainable society”.

But she says there were significant structural problems in the economy long before Covid arrived – “soaring house prices, stubbornly low wage growth, high unemployment and growing underemployment, insecure work, the undervaluing of care and the need to move urgently to decarbonise our economy”.

These are big policy challenges, Dawson says, “that can’t be fixed with more trickle-down tax cuts”.

On the substantive policy point, Dawson is absolutely right. The stage-three tax cuts make Australia’s tax system less progressive than the status quo, and they are fiscally unsustainable.

Her implicit point is also correct. Right now, at this point in history, governments need to prioritise having the fiscal firepower to ensure Australia can grow sustainably after the twin shocks of the global financial crisis and the pandemic.

They also need to maintain a laser-like policy focus on ensuring that inequality here doesn’t get any worse, because the slippery post-truth age that we inhabit, the dangerous resurgence of demagoguery that reached an apotheosis globally when Donald Trump attained the US presidency, has its origins in rising inequality, wage stagnation and anaemic economic growth.

So how did it come to this?

Labor began its long stage-three internal deliberation with senior players hoping they could square their own values circle by keeping the bulk of the government’s tax cuts while imposing a higher rate on Australia’s highest income earners. But in the end, that wasn’t the majority view.

During the last parliamentary term, when Labor believed it was the government in exile, rising to meet a social democratic moment that never materialised, there were rolling, substantive policy deliberations on a huge number of complex offerings.

But after the bitter defeat in 2019, some policy deliberations, like the tax conversation, have become more like risk assessments – how can this particular commitment be weaponised against us?

It would be wrong to present Labor’s tax landing point as all about defence, though.

This decision also says something about where Labor wants to position itself politically in the looming battle with Scott Morrison.

I began this column with Emma Dawson. That vignette highlights the negative impact of this week’s tax decision on any Labor-Greens contest in Melbourne, and seats like Melbourne.

Now Labor would love to get Melbourne back. But that isn’t the current campaign objective. Anthony Albanese is a progressive who holds a progressive seat at risk of falling to the Greens. But if you listen to what Albanese has been saying for a number of years now (and I recommend you do, because it’s not a manufactured talking point, I’m confident he means it) his near constant refrain is progressive people have to stop churning unproductively inside their own bubble.

Change is made when minds get changed. Applying the Albanese doctrine to the political arena, he means Labor wins elections when it can connect with people outside the tribe, and when it can convince people who have left the tribe to come back. Labor isn’t focused on winning progressive-held seats. It wants (and needs) to win seats held by the Coalition to form government.

When marginal seats holders attended a digital training session run by Labor’s national secretary Paul Erickson back in May, Michelle Rowland – the frontbencher who holds a western Sydney seat on a margin of under 3% – asked him to articulate the pathway to victory at the next election. Erickson told her the campaign would target Coalition-held seats in the outer suburbs and the regions. The targeted voters were working families worried about making ends meet.

With those objectives front of mind, during the deliberation about tax, Rowland told her colleagues she did not want to be standing on a pre-poll booth in Blacktown, talking to the targeted voters, defending tax increases – either real tax increases, or even worse, the fictions, like the death tax, which was the weaponised version of Labor’s franking credits policy in 2019.

Related: Labor’s capitulation on tax cuts shows the price it will pay to win power | Greg Jericho

If Labor did that again, Rowland’s view was Morrison would win. That was the view that ultimately prevailed.

Not everybody is on board with the decision. Revenue from tax increases funds spending, and there are always lots of spending priorities. In an environment where debt and deficit has lost its salience because the pandemic has re-written the rules, Labor will have some room to move, even without the revenue measures to bankroll the investments, particularly if it can find largesse, like discretionary grants programs, to offer up as savings.

But whoever wins the next election will have to deal with the reckoning that comes on the other side of this crisis.

Labor will probably increase its chances of gaining power by avoiding a fight over tax cuts now.

But ultimately, once Australia has moved into whatever Covid-normal looks like, the next federal government – whether it’s led by Morrison or Albanese – will have to face up to the challenges Dawson nominated as compelling reasons why nations should not diminish their fiscal firepower by giving tax cuts to people who don’t really need them.