Lowest paid to suffer the most from bracket creep

Résumé détaillé

Bracket creep is likely to wipe out half of your pay increases over the next decade unless changes are made to the tax system.

Australians earning less than the minimum wage will lose more than half of their future pay rises to bracket creep, some of Australia’s most prominent economists have warned while calling for an overhaul of the tax system to cover the nation’s growing spending pressures.

Former head of the Productivity Commission, Michael Brennan, chair of the e61 independent think tank, Greg Kaplan and UNSW economist Richard Holden will on Wednesday release analysis of the tax system highlighting the impact of bracket creep over the next decade.

Bracket creep is the process by which a person’s average tax rate goes up due to ordinary pay increases. Liberal leader Angus Taylor is promising to gradually index personal income tax thresholds in a bid to mitigate the impact of bracket creep.

The government has put in place small income tax cuts which it says more than offset bracket creep. It has also not ruled out more tax cuts in the run-up to the next federal election.

The research by e61 and UNSW shows that bracket creep will lift the average tax rate on someone earning $45,000 a year by 5.1 percentage points over the next decade, from 10.8 per cent to 15.9 per cent.

The increase would wipe out 56 per cent of their expected after-inflation pay increases by the mid-2030s. The large hit happens as workers are pushed into the 30 per cent tax rate.

People on $190,000 will suffer a 4.7 percentage point increase in their average tax rate that will cost them 65 per cent of their after-inflation income gains. These workers get pushed into the top marginal tax rate of 45 per cent which starts at $190,001.

Brennan said bracket creep hit the working population unevenly, hurting the lowest paid particularly hard.

He said while previous governments had offset bracket creep with personal income tax cuts, the pressure on the budget meant a broader tax base was needed.

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