Exposing the Stealth Tax: the Bracket Creep rip-off

Robert Carling, Michael Potter
13 December 2015 | Research Report 8
Exposing the Stealth Tax: the Bracket Creep rip-off

View Interactive Snapshot

Bracket creep occurs when taxpayers pay a higher tax rate as their incomes increase due to inflation and economic growth. The tax increase due to bracket creep is $6 billion this year and the annual cost will hit $17 billion in 2018-19.

The impact of bracket creep is largely regressive, hitting low income earners harder. Taxpayers in the decile from $37,500 to $46,500 are worst hit, facing a $1,300 reduction in take home pay (a 3.3% cut) in 2018-19. Bracket creep is causing 2.5 million taxpayers to face higher marginal tax rates, but the impost causes average tax rate to go up for all taxpayers.

Most of this impact is caused by inflation, with real wages growth causing a smaller but still important increase in tax rates.

Bracket creep discourages employment, innovation and skills acquisition, and encourages tax avoidance. Bracket creep also harms budget transparency, and the flexibility it provides to governments often result in stealth tax increases. The government is also inconsistent in refusing to index tax thresholds, while still indexing excise on alcohol, tobacco and fuel.

To address this issue, the government should index tax thresholds to wages growth, or set thresholds at a fixed proportion of average wages, with no discretion. Discretion is fraught with risks, and is likely to result in tax increases based on Australian and overseas evidence.

Buy Hardcopy
Latest Publications

The case against tax increases in Australia: The growing burden
Michael Potter
07 June 2016 | Research Report 15

View Interactive Snapshot The tax burden imposed by the Commonwealth Government alone, and by all Australian governments, is above its historical levels and forecast to go well above these averages. Similar results are obtained if the budget deficit is included to measure the long-run tax burden. In the past when the budget was close to balance, the tax burden was…

READ MORE
Taming the Monster: Reforming Personal Income Tax
Robert Carling
05 April 2016 | Research Report 12

Without any change in personal income tax rates or thresholds, the tax burden will increase substantially and many more taxpayers will face high marginal rates over the next few years. The adverse economic impact of personal income tax is already high and is set to rise further if these trends go unchecked. Increasing the thresholds for some or all marginal…

READ MORE
The myths of the generational bargain
Simon Cowan
01 March 2016 | Research Report 10

There has been a marked growth in pension cost and cohort. The percentage of people of retirement age has risen from less than 2% to almost 11% between 1911 and 2011, while the percentage of people receiving the pension has increased from around 30% to 75%. This has been driven both by increasing life expectancy and growth in the real…

READ MORE
Submission to the Senate Economics References Committee Inquiry into Personal Choice and Community Impacts 2015
11 August 2015

The CIS submission into the Senate Economics References Committee Inquiry proposed two tightly targeted areas be changed: 1. That the Department of Health withdraw all financial support for the Health Star Rating system, including explanatory websites, public awareness campaigns, and studies of its effectiveness. 2. That the government restore the tax on ready-to-drink alcoholic drinks (‘alcopops’) to pre- 008 levels, preliminary to an overall…

READ MORE
Principles and recommendations for tax reform - CIS submission National Reform Summit
Simon Cowan, Robert Carling, Henry Ergas
30 July 2015 | The centre for Independent Studies

The slant towards cutting taxes before 2010 was welcome, but for such an approach to return in the foreseeable future, the growth of government spending will have to be curbed and the size of government as a share of GDP reduced. Although tax reform may be pursued independently of the size of government, tax-reducing reform is instrumental to delivering the…

READ MORE