Australians Face Increasing Tax Burden Due to Bracket Creep

Melbourne, Sep 19 (The Conversation) Australians are grappling with the highest average income tax rates in over two decades, prompting concerns that the tax burden might weigh too heavily on the country's workforce.

The latest annual report from the Household, Income and Labour Dynamics in Australia (HILDA) survey, which has monitored the same group of Australians since 2001, highlights significant changes. The survey reveals that for those aged 15 and over, the average income tax rose to 11.7% in the 2022-23 financial year (up from 10.1% the previous year). For full-time workers, the rate was even higher at 20.3% (up from 18.1%).

This surge in tax wasn't due to increased federal rates but was caused by a phenomenon called “bracket creep,” where rising nominal incomes and fixed tax thresholds result in higher taxes.

In Australia, unlike some other countries, income tax thresholds are not indexed to inflation, leading to this “bracket creep.” For example, a worker earning AUD 18,200 in 2013 would have paid no income tax as it was at the tax-free threshold. Fast forward to today, even with inflation adjustments, that worker would be earning AUD 25,662 and paying tax despite having the same purchasing power as in 2013.

Such situations apply to higher-income earners as well. Because thresholds are not indexed to inflation, even if incomes don’t grow in real terms, the nominal increase in income leads to a higher tax share. Between 2011 and 2023, household income before taxes rose by 48% nominally but only 10% in real terms.

Despite current high tax rates, the trend has fluctuated. From 2006 to 2011, the average tax rate for full-time workers decreased from 19.4% to 15.7%. However, since 2011, the rate has mostly increased. While the government occasionally adjusts the tax schedule, such changes have not fully removed bracket creep, although the upcoming Stage 3 tax cuts in 2024-25 should help alleviate some pressure.

Data from HILDA reveal that individuals aged 35 to 54 contribute the most in taxes, while those 75 and over pay the least, illustrating differences in income levels and the favorable tax treatment of retiree incomes, such as superannuation.

The question remains about how best to manage and distribute the tax burden. While increasing taxes can support public services, indiscriminately raising taxes on labor income could deter work and unfairly target mid-age earners.

Exploring alternatives to bracket creep, such as addressing non-labor income concessions or increasing taxes on goods and services, could contribute to a more balanced tax system. Options such as road user charges, broad-based land taxes, and inheritance taxes should also be considered to create a fairer and more efficient framework. (The Conversation) GSP

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