The tax offset was initially introduced as a temporary measure under the Turnbull government in the 2018-19 budget, but extended during the pandemic and then boosted in March last year.
The increased tax has been described as the equivalent of two Reserve Bank interest rate rises by experts, but economists also say it will save long-term pain.
“I know it will cause a lot of pain for many households,” AMP chief economist Shane Oliver said.
“But by the same token, if it is extended, it could mean more interest rates than otherwise would have been the case.”
Once the break is wound back, those earning $50,000 will be about $29 worse off per week.
However, while it will come as a blow to many households, assistant treasurer Stephen Jones defended the proposed move.
“It’s important we are ensuring through sound economic management that we don’t make the inflation problem worse,” he said.
However, deputy Liberal leader Susan Ley criticised the decision as “just another hit to Australian families already going backwards”.
While Australians are facing the squeeze from cost of living increases and interest rate rises, the federal government is also looking for ways to make ends meet.
The dramatic scale-up in defence spending to pay for a fleet of nuclear-powered submarines will cost the government billions upon billions of dollars, with the AUKUS agreement estimated to cost $368 billion over its lifetime.
Australians will be given further tax relief next year when stage 3 tax cuts – which impact everyone earning between $45,000 and $200,000 – kick in.
However, those have faced heavy criticism themselves as they will benefit high-income earners more than anyone else.
The Greens have called for the tax offset to remain at the expense of the stage three cuts.
”Labor is making everyday people pay for the stage 3 tax cuts for politicians and billionaires,” leader Adam Bandt said.
“Australia desperately needs to stop the handouts to billionaires and corporations so we can tackle the cost of living crisis by getting dental into Medicare, boosting income support and freezing rents.”
Independent MP Dai Le also expressed her concern about the reported rise.
“I think the low and middle-income earners share the burden or carry the burden of our tax system,” she told Today.
“It’s going to be really challenging at this point in time where we’re all facing this cost of living crisis.”
The budget will be announced in May.