Last week, the Parliamentary Budget Office issued a report Changes in average personal income tax rates: distributional impacts’ which found the federal budget will be in surplus by 2021. As good as it sounds, if this optimistic projection is to be believed, it’s it will be thanks to you and me paying more tax, not Scott Morrison’s brilliance. The government simply relies too heavily on income tax bracket creep to fill its revenue shortfall, in detriment to the average worker trying to make a living.
The report shows that between 2017–18 and 2021–22 a whole cohort of lucky individuals are expected to move into a higher tax bracket as a result of income growth. These tax thresholds are not indexed and fail to adjust over time, in comparison with incomes, which increase with inflation. As a result, they will pay increasingly larger percentages of their income in taxes. With a projected 2.3 per cent average tax rate increase as an example, the tax on someone $46,000 annually – below the average weekly income – will go up by 21.5 per cent. This is a massive amount. How are Australians meant to budget for the future, when their taxes go up this much in one year?
The main victims of this will be the middle-income earners who are automatically pushed up into the higher tax bracket as their incomes rise, causing them to fork out thousands extra of their hard earned money annually.
Some 1.8 million of these are going to be pushed into higher tax brackets. How is this acceptable to either the Coalition or Labor?
This upper middle-income range will become the norm for so many taxpayers even though their real income isn’t increasing at all. Putting 1,706,000 more people into this higher bracket in the space of seven years should be an affront to our major parties’ reasons for being.
The implications go far beyond individuals paying more income tax. With reward and recognition reduced to nonsense by the tax system, incentive disappears.
The current tax brackets have remained unchanged since June of 2008, where the middle-income and higher-income tax thresholds are $80,000 and $180,000 respectively. If they had been kept up with inflation, they would now be at $92,800 and $209,900 thresholds.
If our government does not begin to act, the entry-level positions in our economy will be pushed up into the middle and higher income thresholds. The notion of progressive income tax will have been effectively ended.
The only viable solution to this is indexing marginal tax rates to average earnings, enabling this tax rate to increase at the same pace as inflation, in line with that of income.
This would eliminate the potential for bracket creep, and allows individuals to keep their rightfully earned incomes in their own pockets, where it belongs. It also teaches government’s to live within their means.
Sarah Ray is a Research Associate with the Australian Taxpayer’s Alliance.
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