Much of the commentary surrounding the Coalition government’s three-stage Personal Income Tax Plan (PITP) — as originally legislated in 2018 and embellished in 2019 — has focused on the magnitude of the Stage 3 tranche of tax cuts intended to commence on 1 July this year. Some commentators have questioned their affordability, while others point to the large differences in the dollar value of the tax cuts at high incomes compared with those for lower income earners.

However, this commentary typically fails to acknowledge the effective tax increases paid by all taxpayers through bracket creep, which is a constant force; increasing tax rates in Australia’s progressive personal income tax system. Critics of Stage 3 also typically fail to recognise the tax relief that low- and middle-income taxpayers received in Stages 1 and 2 of the PITP or the relativity of the dollar amounts of the Stage 3 tax cuts to the total amounts of tax higher income earners pay.

To assert it is unfair for higher income earners to receive larger tax cuts under Stage 3 than lower income earners, in absolute dollar terms, is to ignore that those on higher incomes have paid far more tax because of bracket creep than low- and middle-income earners.

The essential issue addressed in this report is income tax bracket creep — how it is measured and how we should evaluate the discretionary tax cuts offered as an offset to bracket creep. This puts the Stage 3 discretionary tax cuts squarely in the framework of ongoing bracket creep. Of particular interest is the distribution of tax cuts by income level - considering the assertion often heard that the larger absolute tax cuts under Stage 3 at higher incomes were inequitable.