Bracket creep is predicted to increase income tax to 46% of total tax revenue in the next ten years.
Governments avoid addressing bracket creep because it generates additional revenue without needing to announce unpopular tax hikes.
With the introduction of the Goods and Services Tax (GST) to Australia in 2000, income tax made up about 36 percent of the government’s total tax revenue. The implementation of this new consumption tax was pitched to the public as a means to provide additional revenue to the government, which would then be distributed to the states. It was also promised that by abolishing inefficient taxes and reducing the need for future income tax hikes, the overall reliance on income tax would decrease. As a result, income tax as a percentage of the GDP decreased while GST (replacing the federal wholes tax) increased.
However, a study by the Parliamentary Budget Office (PBO) indicates that personal income tax is projected to reach a high of 46 percent of Australia’s total tax revenue in 2034 due to bracket creep. This phenomenon occurs when tax brackets remain unchanged, but increases in wages push individuals into higher brackets, resulting in higher tax payments.
This trend is estimated to cost Australian workers around $500 billion over the next decade. The PBO observes that bracket creep allows the government to work on balancing the budget without officially raising income tax rates.
If the government adjusts the income thresholds at which individuals start paying higher taxes, it could prevent average tax rates from reaching record highs.
Forfeiting the revenue gained from bracket creep would maintain the average personal income tax rate at 24.9 percent, rather than rising to 28.5 percent. However, this decision could jeopardize the Australian government’s fiscal balance and delay the budget from returning to surplus within a 10-year timeframe as anticipated.
The PBO suggests that unless the government introduces new federal taxes or reduces spending, the increasing share of personal income tax will continue to fund public spending through bracket creep.
A mere 5 percent adjustment to the country’s tax mix would require policies worth approximately $40 billion annually, a sum equivalent to the entire medical and pharmaceutical benefits system and nearly matching Australia’s defense budget.
Treasurer Jim Chalmers acknowledges the importance of recent tax cuts but notes the PBO’s assumption that there will be no changes to the income tax system for a decade is somewhat bold. He emphasizes the significance of the stage three tax cuts that came into effect on July 1, aiming to combat bracket creep effectively for the benefit of all taxpayers.
However, it seems that the Albanese government is hesitant to implement significant changes to income tax policy in the near future. Chalmers stated, “People should not expect us to propose major new income tax cut policies for the 2025 election.”
