Published by Australian Financial Review, Thursday 7 June
Sometimes, just sometimes, budgets change the national economic debate. Since the controversial 2014 budget – widely perceived as being unfair – debate quickly jumps to the “fairness” of any new policy proposal. The enduring legacy of the 2018 budget is that ordinary taxpayers are a whole lot wiser about stealth tax rises through bracket creep.
For the past seven years, bracket creep has been the major budget repair strategy. Government revenues increased from 21.5 per cent of GDP in 2010-11 to 24.9 per cent this year. Most of this has been because of growth in personal income taxes, which grew from 9.5 to 11.2 per cent of GDP over the same period. Unexpectedly high corporate tax collections this year also made a contribution. Government belt-tightening was not a contributor: expenditure has actually increased as a share of GDP since 2011.
Bracket creep accounts for most of the personal income tax increases. Bracket creep is not just about people moving into higher tax brackets. It also occurs because as a person’s income rises, a greater share of that income is earned in their highest tax bracket. This means their average tax rate creeps higher over time. Without periodic tax cuts, everyone will pay more of their income in tax over time, although bracket creep particularly affects middle-income earners – those earning between $37,000 and $55,000.
Governments could easily address the impacts of bracket creep by increasing the thresholds for each tax bracket each year in line with increases in wages (or at least prices). But they prefer not to because bracket creep is an easy way to increase taxes without much political pain. And then they also get the political sugar hit of periodically “returning” bracket creep through tax cuts.
The government was hoping for exactly this hit with its seven-year, three-stage personal income-tax plan in the 2018 budget. But Scott Morrison let Australians in on the trick. The budget explicitly talks about the tax plan as providing “protection from bracket creep”. And the Treasurer has warned us that bracket creep would otherwise have Australians paying an additional $52 billion in tax over four years.
Better off, but not much
Morrison’s self-appointed role as Australia’s bracket-creep protector may be somewhat overstated. The tax plan will cost the budget about $20 billion a year in forgone revenue in a decade’s time. But this is only a partial return of bracket creep: most people will still be paying a substantially higher average tax rate in the future than they are today.
Under the government’s plan, a middle-income earner – earning about $45,000 today – will face an average tax rate of 19 per cent in 2028 compared with less than 15 per cent today. If the government didn’t proceed with its plan and left tax rates and scales unchanged, that person would be paying 20 per cent in a decade. So they are better off under the government’s plan, but not much.
In fact, the only people spared from bracket creep in the next decade under the government’s plan are high-income earners: people in the top 10 per cent; that is, earning $120,000 or more in today’s dollars. Their average tax rates stay about the same. As a result, the tax system becomes a little less progressive: the share of tax paid by the top 10 per cent of income earners falls from just over 50 per cent to about 47 per cent.
Nor does the plan address the tax system’s increasing reliance on personal income taxes. Even with the tax cuts, income taxes as a share of the economy are forecast to grow over the next four years, reaching more than 12 per cent in 2022 – levels not seen since before the introduction of the GST.
And the new 23.9 per cent of GDP “tax cap” announced in the budget is unlikely to be a brake on the government’s dependence on growing personal income tax revenues. Given the government’s lack of success in controlling spending – indeed the absence of spending reduction measures in this budget may suggest it has given up trying – either the tax cap or the promise to run budget surpluses are likely to be jettisoned before too long.
If the Treasurer really wants to protect us from bracket creep while balancing the budget, there is only one sure way. The tax base needs to be broadened to make the budget less reliant on personal income taxes from working Australians. Options include: increasing or broadening the GST (with increased welfare payments and income tax cuts to protect low-income earners); greater reliance on taxation on mineral and land rents; and winding back tax concessions such as negative gearing, the capital gains tax discount and age-based tax breaks.
Australia’s personal-income taxpayers are now wise to the bracket creep game. So they are likely to be very unhappy about doing the tax heavy lifting alone.