Bracket creep naturally occurs as inflation pushes wages and salaries into higher tax brackets, which economists believe leads to fiscal drag.
Fiscal drag occurs when the government’s net fiscal position fails to cover the net savings desires of the private economy.
The Morrison government has previously suggested that bracket creep is a key reason as to why the income tax changes need to occur.
Senior economist at the Australian Institute Matt Grudnoff believes these claims are not supported by the data.
“There is no compelling case for an income tax cut to reduce the impact of bracket creep,” said Mr Grudnoff.
“The government’s income tax plan gives most of the tax cut benefit to the highest tax brackets. These high-income individuals are already the most overcompensated,” continued Mr Grudnoff.
- The report analysed the impact of bracket creep from 00-01 to 24-25 to create a bracket creep baseline that is a hypothetical tax rate if bracket creep had been removed and compared that to the current rate of tax.
- Comparing the proposed income tax rates in 2024-25 to the bracket creep baseline shows all income levels are overcompensated for bracket creep.
- If the government’s proposed stage 3a tax cuts are implemented, overcompensation would rapidly rise for those earning more than $95,000 per annum.
- Someone earning $60,000 a year is $1,919 a year better off when compared to the bracket creep baseline. Someone on $200,000 is $19,785 better off than the bracket creep baseline.