Independent MPs push for indexation on tax brackets

Eight community MPs have written to the Treasurer, urging the government to remove the “stealth tax” on working Australians by indexing income tax brackets.

The eight independents included Allegra Spender MP, Dr Helen Haines MP, Kate Chaney MP, Kylea Tink MP, Dr Monique Ryan MP, Dr Sophie Scamps MP, Zali Steggall MP and Zoe Daniel MP, who said indexing tax brackets would not only protect wages but introduce fiscal discipline on governments.

With the upcoming election being fought on cost-of-living driven by inflation, the independents stressed that fiscal responsibility must form part of the fight against inflation.

However, the major parties have already agreed to match spending commitments amassing over $20 billion before the election date even being set, they said.

“Labor say they will fund this through ‘savings in the budget’ and the Coalition say they’ll ‘cut 36,000 public sector jobs’, but what both fail to mention to voters is that they are actually funding these measures through higher taxes collected through the backdoor,” the independents said in a joint statement.

The joint statement explained that bracket creep is a stealth tax on individuals’ incomes resulting from fixed tax bands and the gradual rise in nominal wages over time.

“As a result, the average marginal rate of tax in Australia is higher than almost any other point in Australia’s history and on track to exceed its highest point, notwithstanding the ‘cost of living’ (stage 3) tax cuts introduced last year to much fanfare,” it read.

“With other major tax bases flat or in decline, Australia is becoming more reliant on income taxes over time, suggesting voters should not expect bracket creep to be handed back as generously in the future.”

The joint statement said there were already 17 countries in the OECD that index their income tax brackets, including the US, Canada and the UK.

“Tax brackets in these countries are typically indexed to the Consumer Price Index, but other suggestions – such as the mid-point of the RBA target band – have been raised by economists previously to preserve some of the deflationary impact achieved by bracket creep,” it said.

The crossbench MPs said many Australians don’t realise how bracket creep affects them.

“People think if their pay is going up at the same rate of inflation, they are standing still. However, their purchasing power is going backwards because their average tax rate goes up as more of their income is taxed at a higher marginal rate,” they said.

“Bracket creep highlights the need for a thorough going tax reform agenda. The crossbench signatories believe that Australia needs a wholescale review of the tax system in the next term of parliament to give younger Australian workers a fair go, and address lacklustre productivity, the transition to net zero.”

Member for Wentworth Allegra Spender said ending bracket creep is the first step in reducing the tax burden on young, working people and introducing better budget accountability and spending disciplines.

“The spending splurge of this election is going to be paid for at least part through stealth income tax increases caused by bracket creep. This used to be Liberal party policy – it should be embraced by both major parties,” Spender said.

“This is the sort of long-term economic reform that Australians are looking for. We need to reward effort and ingenuity, support the aspirations of young people, and impose greater accountability on politicians.”

Member for Kooyong Dr Monique Ryan said working Australians are disproportionately disadvantaged by the income tax system in this country— a system that has consistently failed to address the reality that tax cuts in one year just get wiped out by bracket creep the next.

“By taking steps to index tax brackets, the next government can start to relieve the burden on the pockets of working Australians,” said Dr Ryan.

“Hopefully, it will be part of a program of sensible and long-term thinking about tax reform in this country.”

Member for Warringah, Zali Steggall, said Australia relies too much on personal income tax to fill government coffers.

“As we head into an election period, the major parties will announce new policies without any sustainable way to pay for it,” she said.

“Indexing bracket creep will limit the burden on hard working Australians and force government to more seriously look at much needed tax reform, like a more effective PRRT.”

Tony Greco, general manager of technical policy at the Institute of Public Accountants, agreed that indexing tax brackets would limit taxation by stealth and curtail additional permanent government spending.

“Our tax system is heavily reliant on bracket creep, which is funding the lion’s share of additional government spending commitments into the future,” Greco said.

“It’s a lazy way to approach our fiscal sustainability challenges as it encourages inertia on tax reform. The money keeps rolling without any law changes but it’s a slippery slope as we cannot keep taking from the same bucket without impacting living standards, productivity and the transfer of debt to the next generation.”