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Bracket creep hit greatest for middle-income workers: PBO

October 12, 2017

Bracket creep hit greatest for middle-income workers: PBO

Adam Creighton, The Australian, 12 October 2017

Middle-income earners will bear the brunt of bracket creep over the next four years, as routine wage increases push 1.8 million taxpayers into higher tax brackets, according to Parliamentary Budget Office analysis that finds returning the budget to surplus by 2021 will fall almost entirely to taxpayers.

Bracket creep combined with a planned 0.5 percentage point rise in the Medicare Levy from 2019 will more than undo the sizeable income tax cuts implemented by the Howard and Rudd governments for all but the lowest earners by 2021, the analysis found.

“By 2021 the average tax rate for individuals in the lowest two income quintiles is still expected to be below its average in 2000, while the most significant ­increases will have occurred for individuals in the top two income quintiles,” the PBO said.

Compared with 2000, the top 40 per cent of taxpayers will pay average income tax rates almost three percentage points higher.

The PBO estimated that taxpayers in the middle of the income distribution, who have average ­incomes of $46,000 this year, would face a 3.2-percentage-point increase (to 18.1 per cent) in their average income tax rate by 2021 (assuming their incomes rose to keep pace with inflation), which would be above the 2.3-percentage-point average increase for all taxpayers. “While the middle-­income quintile is projected to ­experience the largest increase in average tax rates over the period to 2021, this was also the quintile that benefited from the most significant reductions in average tax rates during the 2000s,” it noted.

Significant income tax cuts ­accompanied the introduction of the GST in 2000 and were ­followed by further cuts over the five years to 2011, initiated by Peter Costello as treasurer and largely implemented by the Rudd government.

Economist Saul Eslake said he wasn’t surprised bracket creep — where rising incomes push up workers’ average tax rates — had been allowed to erode those cuts.

“The cuts weren’t funded by cuts in spending — in fact, government spending was actually rising, in real per capita terms, faster than at any time since the Whitlam years — but rather by temporary revenue windfalls generated by the commodities and asset price boom,” he said. “Nevertheless there will obviously be enormous political pressure for tax cuts between now and 2021, targeted towards people in the middle quintile because that’s where most ‘swinging’ voters are.”

Labor, which proposes to match the government’s promise to lift the Medicare Levy to fund the NDIS but only for higher-­income earners, seized on the report. Treasury spokesman Chris Bowen said: “The government wants to increase personal ­income tax on every PAYG worker earning more than $21,000 a year via the Medicare Levy while Labor supports a more targeted approach.”

Acting Treasurer Kelly O’Dwyer said Australia faced a “tax-tsunami scenario” under Labor, pointing out that the ­Coalition had lifted the second-­highest income-tax threshold from $80,000 to $87,000 last ­financial year — the only effort to deal with bracket creep in six years.

“Our company tax cuts will mean money in the pockets of hard-working Australians, as Treasury modelling confirms,” Ms O’Dwyer said.

The PBO analysis said the return to surplus in 2021 “predominantly” rested on increases in income tax via bracket creep. About 900,000 taxpayers would move into the 37 per cent bracket by 2021, 700,000 into the 32.5 per cent bracket, and about 200,000 into the top 45 per cent bracket, it estimated.

In 2013, the Gillard government tripled the tax-free threshold to $18,200 and lifted the bottom two rates of income tax to 19 per cent and 32.5 per cent, respectively, as part of reforms to partly fund the NDIS.

Mr Eslake said the changes had been “the opposite of good tax design because it narrowed the base and raised the rates”.

He said the government should consider cutting personal tax rates rather than company tax rates.