How to eradicate the stealth tax

‘Bracket creep’ occurs when the thresholds in a graduated tax scale remain fixed despite inflation and growth in real income, resulting in taxpayers paying a greater share of their income in tax. It is the ultimate stealth tax.

Even with low inflation and real wage growth bracket creep can be very costly to taxpayers and bountiful for government revenue. The latest CIS TARGET30 research report released this week (Exposing the stealth tax: the bracket creep rip-off), estimates that cumulative bracket creep since the last change in personal income tax (in 2012-13) will be taking an incremental 2.3 per cent of income from taxpayers on average by 2018-19, and producing an extra $16.7 billion in annual revenue.

Historically the pattern has been for governments to allow bracket creep to continue unchecked for a long run of years and then announce discretionary tax cuts. Today’s circumstances are different. The proceeds of bracket creep have been spent. Far from having a surplus to draw down, the government is running persistent deficits, as highlighted yet again by this week’s budget update (MYEFO).

That is why we are hearing about tax reform that will be, at best, revenue-neutral, with income tax cuts to be paid for by a GST increase. Such a change in the tax mix towards greater ‘efficiency’ appeals to many economists, but sounds like a raw deal to everyday taxpayers.

Not only that, but at least one state premier (Mike Baird) has a plan for the states to receive and spend the proceeds of ten years’ bracket creep after the above-mentioned tax cuts. Should such a plan come to fruition, the end-result would be a much higher tax burden for Australians in 2030. It amounts to saying to taxpayers, you can have income tax cuts soon, but only if you accept a 15% GST, and then the income tax cuts will be taken back (and then some) by 2030 through bracket creep.

In Exposing the stealth tax Michael Potter and I propose to eradicate bracket creep once and for all by automatically indexing thresholds to a measure of income growth or fixing them at particular proportions of average wages.

The research report Exposing the stealth tax: the bracket creep rip-off, by Robert Carling and Michael Potter, was released on Monday, 14 December 2015.