If you wanted to address bracket creep, the Stage 3 tax cuts would be the worst way to do it.
One argument being pushed for the Stage 3 tax cuts is that they are needed to correct bracket creep. But research by the Parliamentary Budget Office highlights that the Stage 3 cuts do little to address bracket creep.
Bracket creep occurs when wage rises take a person doing the same job as before into a higher tax bracket. Because Australia currently has a progressive income tax system, those on a higher income pay a higher marginal tax rate on income earners over various thresholds.
For example, people who earn $80,000 a year pay 32.5% tax on all income above $45,001 but only 19% on the income from $18,201 to $45,000. Once you earn over $120,000 all income above that level until you earn over $180,000 is taxed at 37%. All income earned above $180,000 is taxed at 45%.
As a result the more you earn, the higher your average tax rate, and once you go above tax thresholds the higher marginal tax rate you pay.
The Stage 3 tax cuts will reduce the highest marginal tax rate for people earning $45,001 to $200,000 to 30%. While this may seem to be a good way to solve bracket creep, because bracket creep mostly affects those who earn under $120,000 and the Stage 3 tax cuts benefit most those who earn over $120,000 they are a very poor way to address the issue.
The Parliamentary Budget Office research estimates that out to the start of the next decade someone on the median income of $49,000 will see bracket creep raise their average tax rate by 5.9%pts while the Stage 3 tax cuts will only reduce their tax rate by 0.9%pts.
By contrast someone on $120,000 will see bracket creep cause just a 3.3%pt rise in their average tax which will be completely cancelled out for them by the Stage 3 tax cut.
This research supports work done by The Australia Institute’s Matt Grudnoff.
The reality is the Stage 3 tax cuts do barely anything to ameliorate bracket creep for the bottom 90% of tax payers and are a poorly designed tax cut that only really helps the wealthy.