After Prime Minister Anthony Albanese last week confirmed his government will try to rejig the stage three tax cuts, conservative defenders of Scott Morrison’s original plan have leapt to a familiar line of attack — bracket creep.
They argue that by not removing or shifting the upper tax bands as first envisaged, more Australians will end up graduating into them even if their income has just kept pace with inflation — they’re paying more tax, but their purchasing power is the same.
Opposition Leader Peter Dutton echoed this talking point on Friday, warning bracket creep would be a “grabber of every dollar that you’re earning” under Labor’s plan.
In defence of bracket creep
Treasurer Jim Chalmers responded by emphasising that bracket creep doesn’t just impact those on high incomes — a point backed by sympathetic economists. “We are returning bracket creep where it matters most and where it hurts the most, which is in middle Australia,” he said.
It’s actually the highest income earners that are least affected by bracket creep, as they have no further brackets to graduate into. We could even things up, of course, by adding higher tax bands at the top, but I doubt that’s what Albanese’s critics have in mind.
However, Treasury does estimate Labor’s plan will save approximately $28 billion over ten years, thanks to refunding less bracket creep — though that’s assuming politicians refrain from further tax cuts for a decade (unlikely). But to remove any doubt, teal MP Kate Chaney, among others, has called on Labor to index our tax brackets, so taxpayers don’t need to rely on politicians periodically gifting them back the difference.
But would it really be so bad if they didn’t? There are plenty of other things we could spend the money on. Independent Senator David Pocock has suggested, for instance, using the savings to boost Centrelink payments.
A great many Very Serious Analysts™ will tell you bracket creep is a serious design flaw, an affront to “efficiency”, a procedural unfairness. But the government has no moral obligation to refund it — at least not a greater one than to keep its citizens out of poverty. In fact, in the context of pressing needs for social expenditure, bracket creep can be a perfectly constructive feature of our tax system.
There’s no democratic deficit
A common counter-argument is that bracket creep is sneaky: that if a government wants to raise taxes, it should have to announce each rise so the voting public takes notice. But this takes a narrow view of democratic legitimacy.
Our politicians set unindexed rates for all sorts of things. It’s perfectly legitimate, so long as they do so transparently and we can vote them out later if they “set and forget”. And there are plenty of other important economic factors we don’t index to compensate for inflation — particularly wages, which are automatically indexed in some European countries. Not everything happens automatically; some things, for better and worse, are shifted ad hoc in dribs and drabs.
Given bracket creep’s most fervent critics appear mostly concerned for those on higher incomes, I suspect their real objection is not procedural but substantive; about who pays more, not how.
I suspect they’re also being sneaky themselves — they know that indexing brackets wouldn’t just stabilise our tax base, but that it would erode it. The incentives for politicians to periodically dole out tax breaks wouldn’t go away. They’re irresistible during pre-election pork season. Our social services would simply be less protected from this periodic slashing.
And there is nothing inviolably maximal about our current tax rates — indeed, they’re low by international standards (even our income taxes are, once social security contributions are factored in). Instead of being set in stone, our tax rates should evolve with our social needs.
‘It’s time’ for more tax
In the past decade, voters and their representatives have effectively decided that such needs are growing. For instance, we now expect our government to devote far more resources to ensuring people with disabilities live dignified lives.
The resources required to provide for longstanding systems, such as Medicare, have also increased, partly due to our ageing population, which sees more people actually using social services and relatively fewer working-age people paying for them.
Most economists thus agree Australia has a structural revenue shortfall. It’s being papered over by a temporary boost to commodity prices for now, but when that dries up, a reckoning will come — and Chalmers knows it. He’d be wise to plug the hole by raising taxes on assets, as they’re taxed less than income.
But bracket creep can also play a complementary role. It helps ensure that our tax coffers grow somewhat as spending pressures rise — it’s what wonks might call an “automatic stabiliser”.
In the past, as public demand for social expenditure similarly rose, bracket creep helped bring it to life. In the 1972 election campaign, for instance, Gough Whitlam transparently promised to use bracket creep to finance his nation-shaping reforms. We remain indebted to his decision.
How many social advances might we forgo, and how might we degrade existing ones, if we always preference individual take-home pay over collective goods?
Albanese’s stage three pivot was a brave gamble. If forced to make concessions to get his legislation through Parliament, I hope he navigates a solution closer to Pocock’s. We mustn’t place a permanent handbrake on social spending when we need to accelerate.
Is bracket creep a valid argument against the stage three tax cuts pivot? Let us know by writing to letters@crikey.com.au. Please include your full name to be considered for publication. We reserve the right to edit for length and clarity.
A good article overall, but one problem with it: it implies that the bracket creep criticism of the revamped Stage 3 is worth responding to, other than with howls of derisive laughter, Bruce. A progressive tax scale is a vital component of a social democracy, and Morrison’s Stage 3 was a brazen attack on it. It’s probably the case that most taxpayers don’t understand marginal tax rates, so they’re at the mercy of spin. If Labor had stuck with the original Stage 3, as it looked as though they would, that would have been a betrayal of what they’re supposed to stand for. The media generally, including the ABC, is letting us down right now by focusing on what they imagine is the politics of the change, instead of explaining what’s going on, and applauding the restoration of sanity.
Yes. Well said. And indeed, the media are letting us down, particularly by NOT explaining. But I did see (once) a very good explanation of marginal rates (on ABC TV – shame it’s not repeated as much as nearly all the other content the ABC currently generates).
The argument that ” Bracket Creep” will make the proposed tax changes less credible is nonsense, While many gullibles will not challenge that argument, it is demonstrably insignifican except in very marginal cases which can, no doubt be presented and rejected. Albo’s crowd are to be congratulated for doing the right thing rather than complying with cynical wedge which Morrison’s 3rd stage proposal was intended to achieve. Well done Albo!
Didn’t you love the Weekend Aus. “TAX TRAP FOR MIDDLE AUSSIES” headline? Then the smaller heading about 1.2 million Workers being worse off. The text then saying this would/could/might happen over the next decade, IF this that and the next thing happened!
Great example of spin, hey?
Which is one very good reason why I don’t buy or read Murdoch propaganda.
Friday’s (Adelaide) Advertiser front page was even more creative: ‘$28B ALBO HEIST’.
The choice is pretty simple, if you want gold standard services someone has to pay, and you cannot buy them on a ‘beer and chips’ tax system budget. Gold standard services requires a tax system that works effectively and efficiently. So, stop relying on windfalls and accept the tax system is needed by us all. Stop trying to paint politicans into policy corners. Stop encouraging media personalities from writing government policy with badgering pollies into promises that remove their ability to govern. Oh, and stop baying for tax cuts all the time. Someone has to pay.
Yep, look no further than America which has a much lower Tax take than we do, but their Health System, their ever increasing numbers of Homeless people, including War Veterans, etc., show that their Expenditure side is at the opposite end of the spectrum to “Gold Class” Services.
Hi Peter, if you include health insurance, education, tipping, and various other charges as akin to taxes then Americans are probably the highest taxed people on the planet.
Education and tipping are akin to taxation what ?
Yep,
Some countries have free education that is included in the tax you pay so if you need to pay then you are paying a tax.
for example I live in a country that has higher taxes but I have a free degree. You live in a country that has lower taxes but your degree puts you tens of thousands of dollars in debt. You are paying a tax to educate yourself that comes out of your pocket.
tipping is an impost on your spending that works exactly like a gst.
go into any restaurant in the US and you will pay an extra 20% on your transaction.
Don’t go to a restaurant then ? Don’t tip if you do ?
These things are nothing at all like taxes because they’re voluntary.
Try not paying a tip in an American restaurant and tell me it is voluntary.
Well, I wouldn’t recommend heading back there again afterwards.
But the point is it’s part of the cost of the meal and service, not a tax. I hate tipping as much as the next person, but if you don’t want to tip, don’t eat out at places where you’re expected to tip.
Nobody sensible would try and say the local bakery charging 50c for some tomato sauce to go with your pie a “tax”.
No, the US taxes are not much lower. There are Federal Taxes that are often compared to our taxes, there are State taxes that we do not have, and there are local taxes that we do not have.
Together, the taxes are not that different.
They also have a different expectation of the wealthy who are ‘worshipped’ as benefactors, but are generally spending/wasting their money on ‘vanity projects’ and/or pouring money into political parties (via PACs)
You are right that, in spite of the money floating around, the services in the US are of a lower standard (unless you have money to pay). “Land of the free” Ha!
If bracket creep was a concern for the conservatives, why didn’t they raise the tax threshold when in power? Oh but that would also benefit low income earners, wouldn’t it. They wouldn’t want that, as shown by the design of their stage 3 cuts. They’re just so full of sh.t that it’s hard to believe that anyone would see them as credible politicians, let alone people capable of running a country.
That’s the question I keep asking – why didn’t Morrison and Frydenberg legislate for their tax cuts in one go, rather than postponing for the higher income brackets for 5 years?
Possibly so that they could pin the resultant “debt and deficit disaster” on someone else.
They cynically planned it so it would pan out the way it has. They’ve succesfully wedged Labor, who are too gutless to just scrap the whole thing the minute they were elected, which would have cost them a lot less votes in the long run.
Moving into the next tax ‘bracket’ should be a sign on success and a nod to contributing a little bit more to the society that has supported our success.
The argument should be that further brackets should be added for those whose ‘success’ is even more due to the Society that is supporting them.
There should be no ‘creeping’ about the process but a triumphant ‘leaping’!
But in all seriousness, the fact that extra tax is paid only on the dollar that is in the next bracket, should be stated over and over again. Many salary earner are surprisingly ignorant about how tax is calculated and think all their money (or the money people are aspiring to earn) is taxed at the higher rate once they move into the next bracket.
The real issue is that, with smart tax advisors, most people ‘invest’ into tax schemes that reduce tax liability. The distortion eg. Negative gearing, artificially multiplies our society’s problems, and for what advantage? It is a wasteful not a productive use of capital. So our country’s economic strength is not even enhanced.
Fifty odd years ago, I recall a fellow student who said that his objective was to become the highest taxed person in Australia. Good angle.
“But in all seriousness, the fact that extra tax is paid only on the dollar that is in the next bracket, should be stated over and over again.”
Yes, indeed.
Yes, we need much higher taxation on higher brackets. I seem to remember, as a kid in England in the 1960s / 1970s, the highest tax rate was 95c in the dollar (19 shillings in the pound). A tax rate like that would help fix a lot of the problems we have in Australia now, but the whining from the likes of dear Gina would be deafening