By MILLIE MUROI, Economics Writer
Taxes are a necessary evil – which is why neither side of politics is willing to sign themselves up to the best way to keep them in check.
While most of us acknowledge the merits, you’ll be hard-pressed to find anyone jumping for joy when they find out their tax bill is growing.
The one you’re probably most familiar with is personal income tax – a chunk of your income scooped out from your salary every pay cycle. Luckily for politicians, it’s not often that they need – or choose – to raise them.
That’s because the tax system is designed in a way that “naturally” fattens the amount of tax raked in by the government every year. You’re paying more in tax this year? “Not our fault,” they can shrug. It’s simply the way things are.
As you know, we pay bigger tax rates within higher tax brackets (slices of our income) with the amount of our income determining which rates – and ultimately, how much tax – we pay. While your income usually climbs each year, those tax brackets and rates don’t budge automatically.
When the growth of your pay packet is faster than the rise in consumer prices (such as the price of the champagne you might crack open after a pay rise), it’s not so bad. But when your pay isn’t keeping up with inflation, your tax bill still increases, leaving you doubly worse off.
This extra tax you pay is called “bracket creep”.
If we let it march on unchecked, by 2031, the average full-time worker is on track to get bumped from the 30 per cent tax bracket to the 37 per cent tax bracket, regardless of whether their wages, in “real terms” (after allowing for inflation) are going backwards, forwards, or sideways.
So, why is no politician on the crusade against bracket creep?
To be fair to Opposition Leader Peter Dutton, he had one of the best ideas in this broadly uninspiring election campaign: change the system. “Bracket creep, as we know, is a killer in the economy,” he declared in an interview this month, adding a worthy note of urgency: indexing (or raising tax brackets in line with inflation) needs to be introduced – quickly.
How quickly, exactly? Well, this is where his sensible idea seems to fade into a vague mist of political fantasies. First, we’ll have to “get the budget into a position where we can index the brackets”, he clarified at a later press conference on his campaign.
That’s about as clear a caveat as mud. What is that magical budget position? A budget surplus? By how much? And with the budget now, under Labor, forecast to remain in deficit for the next decade, it’ll be more than just the average worker being pushed into that 37 per cent tax bracket by the time the budget is back in balance. But if the Coalition (if elected) makes some deep cuts to spending, gets gifted some unexpected jumps in the tax on income from mineral exports, or rakes in significantly more money from other taxes, perhaps then.
But with plenty of policy costings yet to be released just a week out from election day, how are we to know if the Coalition has a coherent plan to get the budget – and apparently the country – “Back on Track”?
Dutton also labelled his idea an “aspiration” rather than actual policy, just about giving it a final kiss goodbye in the graveyard of good ideas. I can “aspire” to kick a goal for the Matildas once I get myself into a position where I can do that. I’ll leave the judgment to you on how likely that is.
Labor’s stance is not promising either. Prime Minister Anthony Albanese hasn’t even expressed a nice, fluffy goal when it comes to indexing income tax brackets. Instead, he has made a fairly safe tax promise: Labor will generously gift us taxpayers 1¢-in-the-dollar tax cuts in 2025-26 and 2026-27 for the lowest slice of our income that we pay tax on. That works out to be a saving of about $5 a week in the first year, and $10 a week the year after.
Sure, that compensates for some of the additional tax we’ll pay from bracket creep. But it’s not a lot, and it doesn’t stop the root problem: the growing number of workers who will be pushed into higher tax brackets in the years ahead.
All we seem to see from either side of politics is this kind of tinkering around the edges. Or, it’s temporary measures such as the Coalition’s low-and-middle-income tax offset in 2018, which gave a tax saving up to $1080 for people earning up to $126,000 a year (until 2022) and their promise this election of a $1200 “cost-of-living tax offset” for Australians earning up to $144,000.
It makes you think bracket creep is a problem neither side of politics really wants to solve – and you’d be right.
Have you ever noticed politicians are always announcing tax cuts, but never tax increases? They can thank bracket creep.
It’s a villain that allows whoever is in government to play the hero: “Look at these wonderful tax cuts and relief we’re offering!” It’s a bit like a doctor ignoring the preventative measures their patient could take, instead offering temporary or tiny relief through various medicines that simply alleviate the symptoms.
Bracket creep is also an excellent revenue driver for the government: a way for them to increase their tax take every year without lifting a finger. Not only does the government of the day get to wave offsets and tax relief around as if these things are a big favour to punters – they avoid having to put their name to the unpopular decision of increasing taxes.
Permanently tying the level of tax brackets to inflation also commits future governments to more budget discipline. If they don’t sufficiently limit the growth in government spending, they can’t rely on the quiet power of bracket creep to boost their coffers.
For now, it looks like neither side has the guts to end the sugar hit they get from bracket creep – all at the cost to workers’ pay packets. Getting tax “Back on Track” has a nice ring to it. If only Dutton had the guts to go with it.