Stage 3 tax cuts do little to correct bracket creep except for the wealthy

by Greg Jericho

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.

Related research

General Enquiries

Tanya Martin Office Manager

02 6130 0530

Media Enquiries

Jake Wishart Senior Media Adviser

0413 208 134

RSS Feed

All news