(Updated June 2015)
Bracket creep, also referred to as a “tax trap”, will see Australian workers move into higher tax brackets as a result of wages rising in line with inflation—and reap the Government an extra $25 billion over the next four years—according to new research conducted by the National Centre for Social and Economic Modelling (NATSEM).
How does this work?
Bracket creep goes like this:
- The Government sets several tax “brackets” that determine how much income tax you pay.
- More income = higher tax bracket = you pay a higher percentage of your income as tax.
- Most people get a raise every year or two, so their salaries keep up with inflation. When your income increases, you eventually move into a higher tax bracket. That means the rate (percentage of your income) paid in tax to the Government goes up.
- So, unless the Government changes the tax brackets in line with inflation, then everybody ends up paying more income tax. If the Government never changes the brackets but inflation carries on naturally, then over time almost everyone, even young grads in fast food jobs, could be in the highest tax brackets.
- Therefore, even though they might claim they are not raising taxes, the Government collects more revenue from taxpayers via the ATO.
NATSEM’s Ben Phillips explains that unless our current Federal Government embarks on personal tax reform, the poorest Australians are going to be the hardest hit:
To be fair, those tax brackets should be increased in line with inflation. Because they’re not increased to inflation people naturally move up to higher income tax thresholds.”
That places those Australian taxpayers who are already doing it tough in an even worse financial position.
Tony Abbott concedes that the government is aware of the problem, noting:
the average Australian taxpayer will pay the equivalent of $3,800 more tax every year as their income rises in line with inflation, and tax brackets remain the same.”
Will the Government help taxpayers overcome bracket creep?
With the Federal Government aware of the problem, but yet to announce changes they plan to implement to help, it remains to be seen just how long it will take for bracket creep to be brought back under control.
Without the tax reform that’s required, NATSEM states, the income tax rate for the average Australian taxpayer will rise from 23% to 28% of their income.
And, if wages rise higher than inflation, the forecast impact of bracket creep will be even greater.
In the Media:
Federal budget gets a boost from higher income tax, hidden in bracket creep
The much-discussed federal budget appears to be buoyed by rising revenue that is coming directly from taxpayers. While the Government claims it is against raising taxes, by not addressing bracket creep it quietly sees income tax rates climbing for many Australians.
Here are some recent news articles and editorials about bracket creep:
Income tax on individuals is projected to increase by almost a third from $176bn this financial year to $234bn by 2018-19, far more quickly than any other economic variable.
The failure to reset tax brackets will push the average full-time worker, earning $78,000 a year, into the second-highest tax bracket in 2015-16, with any earnings over $80,000 subject to a 37 per cent tax rate, 39 per cent including the Medicare levy. As a result, the average worker will be slugged an extra $1200 in tax a year, and the average income tax rate will rise from 21.7 per cent to 27.4 per cent over the next decade.
Bracket creep refers to a government allowing inflation to push taxpayers into higher tax brackets, without any change to tax policy.
The government relies too heavily on income tax bracket creep to fill its revenue shortfall.
What do you think about bracket creep? Is it fair that taxpayers are slugged with more and more tax each year, when corporate tax dodgers sometimes get away with paying next to nothing? Let us know your thoughts over on Facebook!