Tax cuts the Albanese government has promoted as “meaningful cost-of-living relief” will be wiped out in just two years due to bracket creep, an economist has revealed.
Australians will pocket between $350 and $4,500 extra this year due to tax cuts which kick in on July 1, with Westpac estimating the average taxpayer will be $1,880 better off.
The extra income is the result of the Stage 3 tax cuts passed by the previous Coalition government in 2018 and modified by the Albanese government earlier this year.
According to the Albanese government, the tax cuts will “provide meaningful cost-of-living relief to middle Australia and all Australian taxpayers”.
However the chief economist at the Australian Taxpayers’ Alliance, Dr John Humphreys (ATA) says the tax cuts will only compensate Australians for “stealth tax increases” which have occurred over the past two years due to bracket creep.
“The stage 3 tax cuts that came into force today are a good step in the right direction, but it’s not enough,” Dr Humphreys told SkyNews.com.au.
Dr Humphreys said over the past two decades, inflation and low real wages growth had pushed Australians into “ever-higher tax brackets”, meaning taxpayers were paying more in tax without an equivalent growth in their real wages.
“This is a stealth tax increase that happens automatically each year,” the ATA chief economist said.
“The consequence is that Australia’s real tax per person is now 50 per cent higher than it was just 20 years ago, and the tax burden continues to rise every year.
“Today’s tax cuts are a welcome adjustment, but they will only compensate us for roughly two years of bracket creep.”
The ATA chief economist’s claims were corroborated by research by the Australian National University’s Centre for Social Research and Methods, which showed 80 per cent of taxpayers would be back to paying the same or higher levels of tax by 2027.
Not only does this undermine the Albanese government’s claim the tax cuts provide Australians with “meaningful cost-of-living relief”, it also shows the modified stage 3 tax cuts have failed to deliver what the original stage 3 cuts were designed to do.
The Coalition’s original stage 3 tax cuts were part of a series of cuts to income tax rates and changes to tax bracket that then-treasurer Scott Morrison said would protect Australians from bracket creep.
According to Dr Humphreys, Australia “desperately needs” serious tax reform which both kickstarts productivity and solves the bracket creep problem for good.
“Australia is suffering through a per-capita recession and a productivity crisis, leading to lower real wages and higher prices. The only sustainable solution is by kickstarting productivity, which can be done by reducing the tax on being productive,” the economist said.
“Then we need to index the income tax brackets to either inflation or nominal wages to remove the insidious effects of bracket creep.”
The ATA chief economist acknowledged Australia’s political class may resist such a reform, since bracket creep enables the government to bring in more revenue without having to overtly increase taxes, but said Australian politicians needed to live within their means.
“If the government is struggling to stay within its massive budget, that is a problem of government over-spending, and the solution is that they should learn to live within their means,” he said.
“The political class should not use their own profligacy to justify ever-higher taxes on productive people.”