'Bracket creep' is a term that describes a situation where income growth causes individuals to pay higher average income tax rates each year. This explainer examines the impact of bracket creep from the perspective of both individuals and government finances.

The first section of this explainer explores why bracket creep occurs and who it affects. It provides context around how personal income is taxed in Australia and explains how bracket creep still affects individuals whose income growth does not push them into a higher tax bracket.

The second section explores why the impact of bracket creep is not the same for individuals earning different levels of income. It also examines how the current structure of tax rates and thresholds compares with those of 60 years ago. This section shows that having many tax rates and a higher top marginal tax rate in the past did not necessarily lead to a more progressive personal income tax system.

The third section looks at bracket creep from the perspective of government finances, and how it can impact the fiscal position over time. Bracket creep has played a key role in fiscal consolidations of the past and it is the most important factor in increasing the tax-to-GDP ratio over the next decade.