Indexing tax thresholds to fight bracket creep will deliver the greatest benefit to low income earners, according to Centre for Independent Studies (CIS) economist Michael Potter.
“Piecemeal solutions, like increasing the $80,000 tax threshold to $100,000 as reported in the media today or increasing the tax free threshold as proposed by the Australia Institute, are not a fix at all.
“We need to fix bracket creep for all taxpayers, especially the great majority of taxpayers earning below $80,000, (around 77% of taxpayers based on CIS calculations),” Mr Potter says.
“Indexation of tax brackets is the only solution that makes sense,” Mr Potter adds.
“Modelling by the CIS indicates that completely addressing bracket creep over the six years from 2012-13 will provide the greatest percentage tax reduction for someone earning $37,159.”
Details of the CIS modelling are available in the report, Exposing the Stealth Tax: the Bracket Creep rip-off, and includes an interactive graph showing the impact of bracket creep for all incomes up to $300,000.
“One-off increases in tax thresholds do not fix bracket creep permanently. This is because inflation and wages growth will eliminate these threshold increases over time. Instead, fixing bracket creep requires the indexation of thresholds to inflation or preferably wages growth,” Mr Potter said.
“The problem of bracket creep is real and genuine. Treasury forecasts it will cut GDP by 0.35% by 2020 if nothing is done, and CIS modelling clearly shows it hits low income taxpayers the hardest.”
Michael Potter is Research Fellow in the Economics program at the Centre for Independent Studies. He co-authored with Robert Carling the report Exposing the Stealth Tax: the Bracket Creep rip-off, and has since released updated modelling of the costs of bracket creep on 15 February.