Bracket creep, that fiscal thief in the night for workers, lives.
Anthony Albanese, just like his predecessor once skited, told the National Press Club on Thursday that he would slay the beast that steals from workers when they accumulate pay rises.
When wage inflation runs into static tax brackets – the top threshold of $180,001, when the 45 per cent marginal rate kicks in, has not changed since 2008 – workers end up paying a higher chunk of their income to the tax office.
Even if you don’t cross into a higher bracket after a pay rise, our progressive income tax architecture means you pay more.
If you got a $10,000 pay rise to hit $200,000 in annual salary, your average tax rate rises from 31.6 per cent to 32.3 per cent.
In Treasury’s “Advice on amending tax cuts to deliver broader cost-of-living relief”, published on Thursday, the department flatly rejected calls to “spend” the foregone revenue from the legislated tax plan on social programs and cash handouts.
“It remains important to deliver an overall tax cut around the size of the stage three tax cuts to unwind bracket creep and lower average income tax rates,” Treasury said. “This case is supported by the ongoing improvement in the budget position and adverse impacts of rising average income tax rates.”
Treasury secretary Steven Kennedy has highlighted the heavy tax burden on workers in the years ahead, especially younger workers, as Canberra tries to meet the rising costs of aged care, health, disability services, defence and debt interest.
Even with the stage three cuts factored in – which would have cost $324bn over 10 years – average personal tax rates would have reached a record 28 per cent by 2030.
Like Michael Corleone in the ultimate Godfather film, because we don’t have indexation of the tax scales, just when you thought you were out, bracket creep pulls you back in.
Labor’s redesign redistributes the incidence of bracket creep so that its effect in the future is spread more evenly.
An average worker on $73,000 under the old plan would have lost the value of their stage three tax cut in four years through bracket creep; that’s been extended to six years on Treasury figuring.
By reducing the first tax rate from 19c to 16c in the dollar, Treasury estimates the redesign produces a smaller increase in average tax rates for the first seven income deciles over the next 10 years.
“In other words, it reduces bracket creep more for these groups compared with both stage three and a no change scenario,” the advice says.
“Under the recommended redesign, average tax rates for higher income earners are still significantly reduced compared to a no change in taxes scenario but by less than under stage three.”
In the first four years of the new plan, the aggregate average tax rate is lower, and then it rises marginally over the balance of the so-called “medium term”.
And doing less to slay bracket creep for higher income earners means Canberra will rake in an extra $28bn in revenue over the decade.
Over the journey, fiscal drag will still be a drag until a bolder government deploys indexation, as many countries do.
Our system continues to ask ordinary wage and salary earners to do the nation’s heavy lifting to pay for an ageing and increasingly needy society.
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