Bracket Creep in Australia
Australian taxpayers are to be slugged an extra $38.5 billion in tax hikes over the next 4 years without notice. While, the cumulative cost of bracket creep is forecast to be $50.9 billion by 2018-19. Bracket creep is when inflation pushes additional earned income into higher tax brackets. Legislative inaction causes bracket creep to be responsible for 60% of the 4.3 million taxpayers forced into higher marginal tax brackets. The result is a tax increase by stealth. All while domestic purchasing power diminishes. This means Australians are not able to continue purchasing the same amount of goods and services.
For the average taxpayer the costs are all too visible, with an average increase of $1800 less annual disposable income, families are that much worse off in purchasing power, struggling to buy food, accommodation, education, or health care at inflated prices. It is also responsible for changes in differentiated earning levels and family situations, which serve a central role in the redistribution policies, along with shaping work incentives and the cost of labour. This hurts low income workers and those transitioning off welfare most. Their combined effect of marginal tax rates and welfare withdrawal – Effective Marginal Tax Rates (EMTRs) amount to 50 cents in the dollar lost from welfare payments, as well as 21 cents (or even 34.5 cents) of each dollar in income tax.
As the problem is expected to worsen in subsequent years, Australia’s tax system is in desperate need of improvement. To index personal income taxes would make Australia more competitive on an international scale. While, it would correct for the overall economic and social costs. Therefore, this proposal would aim to ease bracket creep for Australians in three parts:
- Tighten Commonwealth Government spending and acknowledge that credit expansion plays a significant role in inflation, reducing saving and output. Scrap proposed changes to reduce income taxes from increasing GST.
Bracket creep is accountable for unbelievable amounts of economic mismanagement and malinvestement each year. Bracket creep also accounts for the transfer of wealth. Meanwhile, Australia’s overreliance on increasing personal income taxes for a secure means of economic funding is alarmingly more than any other OECD country, which is not sustainable nor practical on behalf of the 2016 Budget to fund public services and Government debt. With an underlying cash deficit of $37.1 billion. The Commonwealth Government must tighten spending that has reached historical highs, both on a net and gross basis. Australia’s future is being built on debt from in place of wealth for toil.
Throwing borrowed money around like confetti does not generate jobs and growth, it is counter-intuitive for spending to exceed saving and not a justifiable solution for unemployment. As credit expansion is confused for real loanable funds, businesses (near to the financial sector) only expand production in the short-run. While, inflation reduces private savings that would have had otherwise provided to fulfill future employment and output.
Evidence shows that a spending restraint alone can cause a deficit reduction and not through further tax increases. However, Liberal member Dan Tehan’s pressure tactic to slash income taxes is a bid to gain support toward raising GST with remarks in favour of policy proposals to slash income tax for millions of Australians. This trade-off certainly involves higher prices, and for the average worker who pays more tax on every purchase of items that GST is levied. Illustrated by New Zealand, when the top personal income tax rate of 33 percent was paid for twice, once by the introduction of the 1986 10% GST and again by increasing it to 15%.
Two Treasury ministerial briefs, released by the Government, illustrate the economic cost of reducing the budget deficit using bracket creep, rather than spending cuts. In the statement that bracket creep will cut gross domestic product (GDP), by 0.35 per cent in the long term. Despite an anticipated increase in government spending of 0.2 per cent of GDP. As Government spending is significantly high revenue has to come from credit expansion. Ultimately, causing inflation and therefore bracket creep (the stealth tax). While, the second redacted ministerial brief reinforced the Government’s decision to exclude the GST from its tax reform plans. Modelling shows that economic growth generated would account to zero had GST been increased 15 per cent.
- Index marginal tax rates to average earnings, most pressing are lower income personal tax brackets.
To combat bracket creep and to provide workforce participation incentives, the fair alternative to the progressive income tax system is to index the marginal tax rates to average earnings. That is a solution popular among economists and already adopted by other developed nations. In 1976, Malcolm Fraser’s Government had indexed tax scales to inflation, however within years the change was scrapped. Whatever the chosen index it must not be subject at whim to adjustment or discretion, and must be published by an independent authority such as the Australian Bureau of Statistics.
Only since October 1st this year has the Turnbull Government increased the upper limit of the middle income tax bracket, from $80,000 to $87,000, so taxpayers will now only have to pay 32.5 cents for every dollar earned up to $87,000. Where, the income cut-in is prepared to be lifted above the $80K threshold above which dollars earned are taxed at 37¢. Such a change would occur if a worker on $87K were to get a pay increase to $90K, such a top marginal change is small. Currently, taxpayers also pay 49¢ in the dollar when the Medicare levy is added to the 45¢ top bracket.
While, moving into a higher tax bracket can have a larger impact, the fact the Government hasn’t indexed lower income personal tax brackets is alarmingly inconsistent. For those lower-income households that also receive benefits, would double the cost both from raising the marginal tax rate and from the lower benefits one can receive. Helen Hodgson, an associate professor in tax at Curtin University, points out some benefits can be reduced by 50c in the dollar for every extra dollar you earn above a certain level. Those in such a situation would be more likely to change their behaviour toward work.
The present nearest Australia has come toward a viable option besides a fiscal restraint to reduce the offloaded debt burden on the unwilling taxpayer, would be PAYG income tax installments. As PAYG allows taxpayers to pay as you go, making sure income tax assessment takes account of previous installments paid throughout the year, tapping into a sustainable source of revenue that increases as a percentage of GDP. However, automatic indexation does not explain the current total cost to taxpayers resulting from bracket creep which is at least $6.4 billion, and does not rule out discretionary ‘flexibility’ for up and down changes in tax, and only makes them more transparent.
- Scrap tax on superannuation and lower the age and requirements at which superannuation is accessible; rid Labours proposed changes to negative gearing. Change the Treasuries outlook toward tax avoidance amidst bracket creep.
While it is not bad to earn more money or get a raise, though unwittingly Australians are jumping into higher tax brackets. That negate any fiscal gains made from extra income. But like all taxpayers there are some alternative options to circumvent the burden of bracket creep. On an individual level one can increase superannuation contributions and/or negative gear investments.
The first option, assumes superannuation accumulates lower tax in comparison to income. To direct extra income to increase superannuation contributions. Considering one earns less than $18,200. While, this option would have corrected for bracket creep, it has since been discontinued. Following the Coalition’s decision to ditch the low-income super contribution of up to $500, designed to offset the 15 per cent tax on salary sacrificing. While, the Australia Government is bound to increase the age at which superannuation is accessible as the retirement age lifts. Making it less in reach for those wanting to use superannuation for current investments.
Super is not the only avenue, a second option is to resort to negative gearing. Negative gearing is when one runs investments (mostly property) at a loss in the short-term (when loans and related costs exceed rental income), in the expectation to deduct it from their salary and wage income. Australia’s tax deductions in 2013-14 was about $11 billion from the 60 per cent of the two million landlords who made a loss in the financial year. However, the Australian Labour Party proposes to limit negative gearing to new housing from 1 July 2017.
The current alternatives for Australians to avoid bracket creep are projected to be non-existent by 2017. That is why such recommendations include scrapping tax on superannuation and lowering the age requirements at which superannuation is accessible, and scrapping Labours proposed changes to negative gearing. Both of which would provide Australians with more freedom to solve bracket creep on an individual level, rather than relying on the Government to index marginal tax rates to average earnings.
Meanwhile, hardworking Australians are placed in a difficult situation. Lower incentives to work causes the unemployment rate to rise. The end result is increased poverty, jobless families, reduced ability to escape poverty and an increase in crime rates. Such disincentives to earn additional income stem form high EMTRs for higher tax brackets. Even though, it is only natural to see a decline in tax receipts, as bracket creep causes such adverse consequences as encouraged tax avoidance and emigration. However, when economic conditions deteriorate The Treasury instantly blames the larger fall in tax receipts to the decline in the economy, speaking in terms of targets, being well below their pre-crisis projection levels (e.g. the tax-to-wage ratio having fell 9.2 per cent of GDP in 2010-11). Effectively, the Australian Government’s present invention on behalf of bracket creep has discouraged the Australian labour market of the immigration of skilled workers, employment, productivity, innovation and investment.
In conclusion, bracket creep has proven to cause a lower amount of disposable income for Australian households. Therefore, this proposal offers solution that ease pressure on lower income households. This would reintroduce incentives to work. Effectively, there would be a reduction in unemployment rates and an increased ability to escape poverty. In doing so it has suggested ways to improve the current situation in Australia, to see lower and more efficient spending from the Government. It has avoided any increase in GST that would have otherwise resulted in higher prices, both increasing savings and output. The suggested lowering in the age and requirements of superannuation would make it more in reach for those wanting to use superannuation for current investments. At the same time the removal of superannuation tax would reduce the extendable impact of bracket creep.
Featured image supplied free from Pixabay.