MEDIA RELEASE: Analysis shows indexing tax thresholds will save taxpayers $1171 a year on average

CISlogo-640x360If the government wants to be serious about tax reform, then it should be implementing significant cuts to personal tax, argues Michael Potter, Research Fellow at the Centre for Independent Studies, in modelling released today.

The modelling indicates that indexing tax thresholds to growth in wages since 2012-13 will reduce the tax burden by $12.5 billion in 2017-18 (the proposed start date) and $16.5 billion in 2018-19. “Under this option, taxpayers will save $1,171 a year on average in three years’ time,” Mr Potter says.

“Any serious reform should address the problem of bracket creep. As our recent research outlines, bracket creep is a stealth tax that hits low and middle income taxpayers the hardest. It also harms transparency, and is inconsistent with other budget rules that index excise on alcohol, tobacco and fuel.

“In addition, bracket creep is resulting in about 2.5 million taxpayers facing higher marginal tax rates, discouraging employment, innovation and skills acquisition.”

In addition to the indexation-only option, the new modelling illustrates two other options:  a larger option that in addition reduces each of the higher marginal rates (32.5% cut to 30%; 37% to 35%; and 45% to 42%); and a ‘small’ option that only increases the $80,000 threshold to $85,000, indexes this threshold, and in addition cuts the 32.5% rate to 31%.

A person on average full time earnings (around $80,000 today) will be expected to save $1,095 in tax under the small option; $1,885 under the indexation-only option; and $3,043 under the large option.

Further details of the results are in the tables below.

Reduction in total tax burden ($bn)

Year Small Option Medium Option (indexation of thresholds) Large (medium plus cut to marginal rates)
17-18 4.6 12.5 23.0
18-19 5.3 16.5 27.7

 

Improvement in post-tax income per taxpayer ($)

Year Small Option Medium Option (indexation of thresholds) Large (medium plus cut to marginal rates)
17-18 330 901 1,661
18-19 379 1,171 1,963

 

Michael Potter is a Research Fellow at the Centre for Independent Studies, and co-author with CIS Senior Research Fellow, Robert Carling, of the report Exposing the Stealth Tax: The Bracket Creep rip-off.