A relentless, rising run of income taxes

WORKERS can forget personal income tax cuts for the next six years and look forward to relentless annual tax increases for the next 40 years.

WORKERS can forget personal income tax cuts for the next six years and look forward to relentless annual tax increases for the next 40 years if the government cannot pass its budget savings, the Intergenerational Report shows.

The government will be relying heavily on “bracket creep” to return the budget to surplus over the next six years.

Allowing inflation to push an ever larger share of wage and ­salary income into higher tax brackets is the easiest way for the government to lift tax revenue, as any increase in tax rates would require legislation.

Treasury estimates it will take until 2020-21 for tax collections to return to their long-term average of 23.9 per cent of GDP. The IGR assumes that taxes are kept at that level, with tax cuts returning any additional revenue from income rising into higher tax brackets.

INTERACTIVE: The InterGenerational Report

“Although projections in this report have been prepared on the basis of the current tax settings, a better tax system would help Australia to take advantage of global opportunities and improve economic growth,” it says.

The government will release a discussion paper on tax reform next month.

Adding to the political pressure on Labor and the crossbenchers to agree to savings measures to improve the budget outlook, the IGR notes that bracket creep hurts lower and middle-income earners the most.

Someone earning the average full-time wage of about $75,000 would now be paying an average of 22.7 per cent of this in tax. But in 10 years’ time the average wage is expected to be $104,000, with the average amount lost to tax rising to 27.4 per cent.

A person earning only half the average wage would face a much steeper increase in their average tax bill. Their wage would rise from $37,500 to $52,000, but ­because an increasing amount of their earnings are taxed their ­average tax rate jumps from 10.3 per cent to 17.8 per cent.

Bracket creep is less painful for high-income earners. Someone earning double the average wage would see average tax rate rise from 30.5 per cent to 34.3 per cent.

However, it is not only average tax rates that matter.

Mr Hockey said yesterday that the marginal tax rate — the tax paid on every additional dollar earned — had an impact on incentives to join the workforce.

“The challenge at the moment is that we have average wage earners approaching the second highest tax bracket. When they go into that second highest tax bracket it starts to detract from economic growth and also the inter­action with the welfare system as it stands means that there will be more and more disincentive for people to work,” the Treas­urer said.

“We have to give tax breaks to Australians, otherwise if we don’t give them those tax breaks then it starts to constrain the wealth production in the nation.

“Obviously, the faster we can get to the point where as a nation we live within our means — as a government we live within our means — the more capacity we’ve got to incentivise people through tax cuts.”

Business Council of Australia chief executive Jennifer Westacott said the problem of bracket creep required action now, and should not be seen as a long-term issue. “Over the next four years, 1.7 million Australians will move into a higher tax bracket. This is an immediate not a future problem.”

The IGR estimates that, in the absence of savings measures, tax would have to keep rising to an ­average of 28 per cent of GDP ­before the budget came to balance