Tue Mar 1

Vital Signs: stealth tax rises are eating into your income – but we know the solution

Written by: Richard Holden, Professor of Economics, UNSW Sydney

A curious feature of the Australian tax system is “bracket creep”. Taxpayers whose income climbs by no more than prices (inflation) get no increase in their living standards. Instead, they see more and more of their income pushed into their highest tax brackets, or to even higher tax brackets.

It means the government’s income from income tax keeps climbing, even if there are no more people paying it and the value of what they earn hasn’t climbed.

Here’s how it works. The first A$18,200 are tax-free, the rest up to $45,000 are taxed at 19 cents in the dollar, the rest up to $120,000 at 32.5 cents in the dollar, the rest up to $180,000 at 37 cents in the dollar, and anything in excess of $180,000 at 45 cents in the dollar.

Australia’s income tax scale

What each extra dollar of income is taxed at, excluding Medicare levy and offsets

Australian Tax Office It means that as someone’s income climbs from, say, $80,000 to $90,000, a greater proportion of it is taxed at 32.5% and a lower proportion of that new total is either taxed less or untaxed. This happens even if rising prices mean what that person can buy hasn’t changed – or at the moment, with prices climbing faster than wages, means their buying power has shrunk. Bracket creep is increased tax by stealth It’s why every few years the government trumpets a tax cut, which in reality is often no more than giving back some of the proceeds of bracket creep. It could all be ended if the thresholds at which each tax rate cut in were indexed to inflation, climbing each year in line with price increases. Read more: The budget's dirty secret is the tax hikes you're not meant to know about Prime Minister Malcolm Fraser briefly introduced tax indexation in 1976 but abandoned it partially in 1979 and fully in 1982, finding himself not thanked for it. This week in the Australian Financial Review, economics professor Steven Hamilton made a persuasive case for indexation based on “starving the beast.” As he put it, indexing brackets to inflation at this year’s budget may be the Liberals’ last chance this decade to put some brakes on the relentless creep of the state and the sapping of hard work and entrepreneurship, having spent a decade enabling it This argument has a degree of truth to it, for sure. An ever-expanding government is bound to become lazier and spend money less efficiently than a government that is income constrained. And it certainly doesn’t suggest that there is no role for government, as is suggested by US anti-tax campaigners such Grover Norquist: I don’t want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub But there is also a progressive case for indexation. The progressive case for indexation If governments had go to voters and ask for a tax increase to fund additional spending (for any given budget surplus or deficit) then the link between tax and spending decisions would become clear. If voters wanted more services, such as better hospitals or a better national disability insurance scheme, they would have to vote for higher taxes. Bracket creep means the link is effectively hidden from them, as it shrouds the funding of spending. Read more: A simpler tax system should spark joy. Sadly, this one doesn’t It sounds like a subtle shift, but it would be a significant one. Instead of the debate being about “we can get what we want without increasing taxes”, it would become “tax is worthwhile because unless we increase it we won’t get what we want”. Progressives ought to support the shift. The bottom line is that whatever your politics, there’s a strong case for indexing tax thresholds to inflation. It would make our tax and our political system more honest, ensuring politicians actually acted in our interests. Authors: Richard Holden, Professor of Economics, UNSW Sydney

Vital Signs: stealth tax rises are eating into your income – but we know the solution

The Hidden Pitfalls of Owning a Holiday Rental in Australia - and How Professional Management Pays for Itself

Why More Property Buyers Are Getting Expert Help Before Making an Offer

What Makes Buyers Take a Property Listing Seriously?

When Should You Hire a Construction Lawyer for an Adjudication Matter in Australia

Business News

The Rise of Digital Marketplaces in the Australian Trade Sector

How Immigration Lawyers Can Help

How Industrial Drying Equipment Supports Efficient Processing

Practical Ways a Whiteboard Can Improve Workplace Communication

Designing Eco-Friendly Custom Water Bottles for Your Next Event

Why Choosing a Professional Florist Melbourne Makes Flower Delivery Impactful

The Business Case for Choosing Australian Fabricators Over Imported Alternatives

Australian organisations are relying on business continuity plans built for a far more predictable world

How to Rent a Car for Uber in Melbourne: What Every New Driver Needs to Know

The Daily Magazine

How Wide Should Running Shoes Be? Signs Your Shoes Are Too Narrow

Trail Running Shoes vs Hiking Shoes: Which Is Better for Australian Trails?

Architectural Window Shading: Solutions for Triangle Blinds, Raked Glazing, and High Ceilings

From Suburban Streets to Modern Events: Why Australians Still Love the Ice Cream Truck

Will These Bloody Kids Ever Move Out? The Resurrection of the Duplex Says No

Critical Structural Checks to Prioritise Before Renovating an Older Property

Why Regular Gutter Cleaning Northern Beaches Is Important

Double Glazed Sliding Doors vs Standard Sliding Doors: Key Differences

How to Plan a Bathroom Renovation Timeline (Without Surprises)