The half trillion-dollar tax headache facing Australia

Australians face a half trillion-dollar increase in their personal income tax over the next decade if tax rates and thresholds remain frozen in time as a new report warns the federal budget relies increasingly on working people to sustain government spending.

Analysis by the independent Parliamentary Budget Office (PBO) shows that even after this year’s stage 3 tax cuts, the proportion of federal revenue raised from individuals will steadily return to the level that prompted Paul Keating’s overhaul of the tax system in the 1980s.

Whoever forms government, Peter Dutton (left) or Anthony Albanese, will face some taxing problems after the next election.Credit: Michael Howard

So quickly is a combination of bracket creep and falling revenue from other sources hitting the budget, the winner of next year’s federal election will have to cut income tax levels or inflict the highest tax take on workers this century.

When this year’s stage 3 tax cuts were originally announced by then-treasurer Scott Morrison, he argued they would effectively end bracket creep – the process by which a person’s average tax rate goes up as their income moves through a tax bracket or into a new one.

Labor’s revamp of the stage 3 cuts ditched the original plan to axe the 37 per cent rate for incomes of between $135,000 and $190,000. Low-paid workers benefited from the 19 per cent rate, which was to remain, being reduced to 16 per cent for incomes between $18,200 and $45,000.

The cuts, which will cost about $330 billion over the coming decade in forgone revenue, meant personal income tax as a proportion of total government tax revenue fell to 41.5 per cent. It had reached 42.9 per cent, the highest share since 1999-2000, in 2023-24.

The budget office, in its analysis of the federal government’s mix of taxes, found the income tax share will resume climbing next year and surpass the 42.9 per cent mark in 2027-28. By 2030-31, it will have reached 44.3 per cent and, without change, will hit 46 per cent by the middle of the 2030s.

According to the PBO, this increase in the tax take is “a key driver” of the forecast return to a budget surplus in 2034.

The budget office said the tax take on ordinary people could be maintained around current levels by returning bracket creep over the coming decade. Analysts estimate the cost of just returning bracket creep, let alone delivering a real cut in tax, is at least $450 billion over the next 10 years.

Those cuts would have to start in the coming financial year. By 2034-35, the cut in tax in that single year would have to be at least $70 billion.

If a future government does deliver tax relief, the budget office estimates the budget will remain in the red with deficits approaching $80 billion-$90 billion by the mid-2030s.

Independent economist Chris Richardson said the figures painted a bleak future for working people.

“It means that unless there’s some real change, the government is just going to be more and more reliant on personal income tax,” he said.

“Given how hard it is to change Australia’s tax system, that’s the future. We’re doomed to ever higher tax collections from working people.”

The budget office analysis also revealed fuel excise, forecast to raise $50 billion in 2050, would be all but wiped out as electric vehicles replaced petrol cars in coming decades.

Tobacco excise is already falling far short of what had been forecast by the current and previous governments. Between 2019 and 2027, the shortfall is expected to be $25 billion.

The budget office said big increases in tobacco excise may have contributed to the rise in the illegal tobacco trade, “illustrating the trade-offs between using tax to motivate behavioural change and the motivations for non-compliance”.

The revenue from both fuel and tobacco excises, which accounted for 6 per cent of all revenue in the mid-2010s, could fall to just 0.5 per cent.

“Combined, these two shrinking revenue bases represent $60 billion in lost revenue by 2050,” it found.

Warning that the lost excise will have to be found from other sources or cuts to spending, the budget office estimates average personal income tax rates would have to climb about 1.5 percentage points if a future government relied on bracket creep to make up the shortfall.

Apart from its major revamp of the stage 3 tax cuts, the government has not signalled it will go to the election with a cut to personal income tax policy.

Last week, Opposition Leader Peter Dutton walked back his February pledge to go to the election with “strong tax reforms in keeping the stage 3 tax cuts”, saying it would be irresponsible to promise billions of dollars in spending “whether it’s on tax cuts or something else” if it would add to inflation.

Cut through the noise of federal politics with news, views and expert analysis. Subscribers can sign up to our weekly Inside Politics newsletter.