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Will you pay higher taxes due to bracket creep?

  • October 01 2021
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Will you pay higher taxes due to bracket creep?

By Jon Bragg
October 01 2021

Bracket creep will see Australians paying more tax on average, unless further cuts are introduced in the future.

pay higher taxes

Will you pay higher taxes due to bracket creep?

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  • October 01 2021
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Bracket creep will see Australians paying more tax on average, unless further cuts are introduced in the future.

pay higher taxes

The average tax rate paid by Australians could rise to 25.5 per cent by 2031–32 due to bracket creep, according to a new report by the Parliamentary Budget Office.

This compares to the average tax rate of 23.5 per cent expected for the 2021–22 financial year.

Bracket creep occurs where an individual moves into a higher tax bracket due to rising income, increasing the average amount of tax they pay even when tax brackets and rates remain unchanged.

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Previously, the first two stages of the federal government’s personal income tax cuts saw a reduction in the average tax rate between 2017–18 to 2020–21, but the PBO anticipated that the average tax rate will go back to 2017–18 levels in 2023–24.

“Average tax rates will decline again in 2024–25 with the Stage 3 tax cuts but are projected to rise to 25.5 per cent by 2031–32 if there are no further personal tax policy changes,” the PBO said.

“This would be a level not seen since before the introduction of the GST in 2000.”

The PBO said that bracket creep is projected to play a key role in the government’s budget recovery over the next decade. While tax cuts in 2031–32 are expected to cost just over $30 billion, bracket creep will generate $57 billion in additional revenue for the government.

“Outside periods of budget repair, governments have periodically increased tax thresholds or lowered tax rates, with the effect of reducing or even reversing the impact of bracket creep — this is referred to as ‘returning’ bracket creep,” the PBO report explained.

This has led to the average personal income tax rate remaining between 22 and 25 per cent for the majority of the past four decades.

“Governments face a trade-off between returning bracket creep and allowing bracket creep to reduce debt faster,” the PBO noted.

Will you pay higher taxes due to bracket creep?
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