Bracket creep chips away at living standards, especially those of younger generations, a new Issue Analysis by Centre for Independent Studies outlines.
The paper’s authors, Matthew Taylor and Emilie Dye, point out that Australia’s younger workers have the most to lose from bracket creep because bracket creep is regressive and hits harder for those earlier in their careers and making less money.
For those on lower incomes, even a small increase in nominal income leads to a larger increase in their overall tax rate.
And young people feel the loss of income from a tax increase more acutely than those established in their careers with higher incomes and more wealth.
The Issue Analysis outlines what the government should do to stop this hidden tax hitting our younger generations — particularly when they are already struggling with a cost-of-living crisis.
Young people have less bargaining power and will likely struggle to convince their employers to make cost-of-living adjustments to their earnings, let alone the rise needed to compensate for both inflation and a higher tax rate due to bracket creep.
Periodic tax cuts only help temporarily; they barely scratch the surface in offsetting bracket creep’s insidious impact. To genuinely tackle this issue, Australia needs a long-term solution that does not depend on the whims of politicians.
The solution is simple: Index tax brackets to inflation.
The government already does this for Age Pensioners. The Age Pension, unlike tax brackets, is indexed to inflation; ensuring pensioners can maintain the same standard of living. The income brackets used to means-test their pension payments also automatically increase with prices. If pensioners are spared the burden of bracket creep, why not young Australians?
Indexing tax brackets would also fight the cost-of-living crisis
Indexation would help Australians currently facing a cost-of-living crisis. In the 10 years prior to Covid, the annual rate of inflation averaged 2.1%. Inflation in the post-Covid era has almost doubled to 3.9%.
Tax payments are an expenditure. There is only one difference between a tax increase and higher prices at the supermarket: you cannot shop around to reduce your tax bill. Bracket creep further disadvantages workers, sneakily diverting their money to flow to the government.
Indexation would cut the hidden tax hikes that erode real income — a straightforward solution to a complex problem with potential to make a real difference in people’s lives.
Mathew Taylor is Director of the Centre for Independent Studies Intergenerational Program, in which Emilie Dye is a Research Analyst.
Photo by Mikhail Nilov