This report suggests that Australia’s heavy reliance on personal income tax is unsustainable and will worsen without reform. Bracket creep is an automatic tax increase that occurs when income tax thresholds remain fixed while wages rise with inflation. The report proposes a straightforward solution: indexing personal income tax brackets to inflation. The analysis shows that the cost of indexation is modest. 

Indexation would improve workforce participation, increase the incentive to pursue education and training, and strengthen the link between productivity and wages growth. It would also improve fiscal transparency and act as an ongoing constraint on government spending growth.

Key findings

• Australia takes more from taxes on income and profit as a proportion of GDP than 36 other OECD nations.
• While wages are forecast to grow by 3.7% annually over the next decade, income tax receipts are projected to grow by 4.6%, largely due to bracket creep.
• Bracket creep erodes real wages and take-home pay, disproportionately affecting younger and middle-income Australians.
• Indexing income tax brackets would be the most significant economic reform since the introduction of the GST.