Tilley said Chalmers should look at indexing the tax thresholds every year, increasing them either by the inflation rate or the annual lift in wages.
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“Now is the time to again index the personal income tax rate scale to permanently remove the bracket creep effects going forward,” he said.
“This would represent a decisive reform of the personal income tax scale, enabling the tax debate to move to more substantial tax reform issues.”
The independent Parliamentary Budget Office has already noted that without future tax cuts, average tax rates will increase on all Australians – especially those on low to middle incomes – due to bracket creep, notwithstanding the original stage 3 tax cuts.
Tilley said indexing the thresholds would allow the government to focus on broader tax reform, including on taxation of savings and the use of structures such as companies and trusts.
“Indexing the personal income tax rate scale would permanently remove the bracket creep effects, enabling a greater focus on these more fundamental tax base issues,” he said.
Separate work by Matthew Taylor and Robert Carling from the right-leaning Centre for Independent Studies also calls for automatic changes to tax thresholds in line with inflation.
They found that under the current tax rates, a median wage earner on $61,900 a year would pay 17.1 per cent of their income in tax, or $10,600, in 2023-24. By 2032-33, if their wage increased in line with inflation and there was no change to tax thresholds, their income tax bill would reach $12,500.
The cumulative hit to their take-home pay between now and 2032-33 would be $9811, or more than $1100 a year.
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Their research also found that the highest income earners – who had their tax cut halved to $4500 a year under the government’s changes – would fall short of being fully compensated for the accumulated bracket creep of the past seven years.
People earning between $48,000 and $214,000 a year would be “overcompensated” for the bracket creep they had paid under the three-stage reform process.
The findings come as the federal government prepares to make a submission to the Fair Work Commission’s 2023-24 annual wage review.
Chalmers said that while inflation had moderated, the real wages of Australia’s low-paid workers should not go backwards.
“We believe one of the best ways to ensure workers can deal with cost-of-living pressures is to ensure they earn enough to provide for their loved ones and to get ahead,” he said.
Taylor and Carling said if tax thresholds were indexed to the inflation rate annually, the government would avoid delivering “illusory” major tax cuts every three to five years that simply made up for years of bracket creep.
“Discretionary tax cuts in a world of indexed thresholds would be genuine. And if those in power at the time wished to change the tax burden inherent in the indexed scale, they would have no choice but to be transparent regarding their intent,” they said.
Income tax thresholds were indexed to inflation for 18 months by the Fraser government in the late 1970s before the move was abandoned.
Source Agencies
