Australian taxpayers face a future tax increase of $1,180 a year on average if nothing is done about bracket creep, according to this report.

Introduction

There is a large gap between what the Australian government raises in taxes and what it spends. As a result, the government has posted eight consecutive budget deficits , and the former Treasurer Joe Hockey has stated the budget may never get back to surplus under current policies. In addition, many commentators are calling for additional revenue to be raised to reduce the budget deficit or provide scope for additional government spending.

Nevertheless, there are many arguments against increasing personal taxes. Most importantly, they are inefficient taxes that have substantial harmful impacts on work, saving, investment and growth. But also no clear case has been made to increase taxes instead of curbing spending growth.

The importance of tax reform has been acknowledged by many governments in Australia’s recent history. The previous Labor government commissioned the Australia’s Future Tax System Review, chaired by Dr Ken Henry, in 2008. The Final Report of the review was released in 2010; however, most of the recommendations of the Henry review were not implemented.

The Coalition government has now initiated its own tax review and released a discussion paper on 30 March 2015, called Re:think. The government must seize the opportunity from this process to fix some of the glaring problems with Australia’s tax system.

The Re:think discussion paper specifically raises the problem of bracket creep (or fiscal drag), when average tax rates rise automatically in an economy with inflation and growing wages. Our paper shows bracket creep is causing substantial tax increases and as a result is reducing employment and labour force participation.

As the Re:think discussion paper notes, Australia relies more on income taxes than other developed (OECD) countries. This causes our tax system to be more inefficient, because income taxes have more adverse effects than other taxes. It also means that bracket creep has a greater impact in Australia than in other countries.

Importantly, bracket creep isn’t just inefficient; this paper demonstrates it also is regressive because it disproportionately hits low- to middle-income earners.

Nevertheless, the excuses not to fix bracket creep multiply as the demands for increased government spending continue and a number of spending commitments, such as the National Disability Insurance Scheme (NDIS), are locked in.

However, as this report will show, the consequences of ignoring bracket creep are severe. Fixing bracket creep must be a serious priority for all politicians.