Bracket creeps

Creep Poster

From The Australian today comes some analysis by the University of Canberra National Centre for Social and Economic Modelling showing that:

…in the absence of tax cuts, the number of people paying the top tax rate of 45c in the dollar would soar by 134 per cent over the next decade to just under 900,000 as they were pushed into higher tax brackets by inflation and wage rises — so-called bracket creep.

The number of Australians paying the second-highest rate of 37c in the dollar would leap 85 per cent to 3.7 million.

And the effect of people being pushed into higher tax brackets would increase total personal ­income tax by 21 per cent or $32.5 billion, before allowing for growth in the population and workforce.

NATSEM principal research fellow Ben Phillips said the ­effects of this “fiscal drag” over 10 years would “likely have bad consequences for workforce participation at exactly the same time as Australia pushes up against an ageing population”.

The excellent John Freebairn chimed in:

Professor Freebairn said the Henry tax review had found that some of the most inefficient state taxes cost the economy as much as 80c for every dollar they collected. In the case of personal ­income tax, it was still between 30c and 40c, while GST was much more efficient, costing the economy only 10c for every ­dollar.

“Changing the tax mix from (income taxes to indirect taxes) brings gains of 20c to 30c in the dollar and that beats anything that a major corporation could do on productivity,” he said.

Roughly speaking, then, the choice, is between an inefficient and costly bailout of the budget via stealthy tax hikes or a productivity boosting, national interest reform program. Which will our pollies choose I wonder?

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. sydboy007MEMBER

    Surely am argument could be made to first broaden the gst along with target tax cuts and welfare increases. With dead weight removed of 20c in the $ it won’t take too long to see the merits of this and then maybe a land tax can be introduced for some serious income tax and stamp duty cuts.

    Mmm. Just coming off a night shift so I Might be a bit delirious to think this kind of change is possible Australia.

  2. Hunson Abadeer

    A major reform program is critical but for it to be successful you either need bold leadership or a severe crisis… and I don’t see any knights in shining armour

  3. If people are pushed into the higher bracket by wage rises, so be it. The problem is when they are pushed into the higher bracket by inflation. The Australian conflates the two, so that the number of people effected is higher.

  4. Bracket creep is a favoured method of taxation and intimidation.

    Costello always had a smug smile when he talked about “tax cuts” when all he did was undo the tax increase due to bracket creep. Expect more of this, only with Abbott’s smug face.

    Also, the declaration limit of $10,000 when travelling or sending money overseas hasn’t changed in decades, yet inflation has eroded the value of of that amount. Previously 10k was a lot of money, now it is relatively trivial. Why should we be forced to declare such small amounts or be snooped upon by government agencies? (Back in the 90s I remember seeing dotcom jobs of 70k a year – that was big money, now the median)

  5. The personal income tax cuts of the late Howard/early Rudd years went too far so bracket creep over the medium term provides one less headache for Treasury. Bigger fiscal fish to fry.

  6. Higher GST means higher taxation of poor people – exactly what our neolib government wants

    and, of course, all in the name of efficiency

    • Ajaydee73MEMBER

      Exactly. Consumption is a smaller percentage of the income of wealthy people. Consumption taxes are like reverse Robin Hoods. Tax the poor to help the rich.

  7. When ‘the poor’ and entitled middle classes vote for politicians who promise ever increasing welfare handouts and promise to rob Peter to Paul to fund it, HL Meckens observation becomes particularly apt.

    “Democracy is the theory that the common people know what they want, and deserve to get it good and hard.”

    Bitching about 10% GST in an Australian context is hilarious, you people have absolutely no conceivable idea as to how bad direct and indirect taxation can and will actually get.

    Taking the Scandics as an example, the state will confiscate 40% of the average pay packet in direct taxation, and then levy 20-25+% VAT/GST on everything including food and clothing to pay for ‘social justice’

    ‘social justice’ in this instance is the 1/3 of voters who are paid by the state + 1/3 of voters who are on welfare deciding that the remaining 1/3 in the productive sector should pay for it all, because they are ‘rich’. The problem is, even at direct levies in excess of 100% (see the UK and Norway in the 1970s), there are not enough ‘rich’ around to fleece to pay the butchers bill for votes purchased.

    High levels consumption taxation is absolutely required to fund a European style welfare state.

    The golden goose has long been boiled and eaten.

    • drsmithyMEMBER

      Maybe if the glorious private industry paid its workers more and its owners less, fewer people would need welfare to survive.

  8. 30 years of fiscal drag in this manner now means that there are 3 times the amount of earners paying income tax at the ‘higher’ 41% rate on earnings above ~$65k in the UK than there were in 1997 when Gordon Brown began the reign of economic ruin.

    If the tax bands had kept pace with earnings growth since 1997, the entry to this band would close ~$120k

    Politicians never suffer the impact of fiscal drag.

  9. Why do we even have `brackets’? Why not make income tax a continuous function of income?

    Thus, all the (unproductive) effort that goes into avoiding a higher tax bracket could be directed towards productive endeavors.