Independent MPs will use a minority government to push for an end to tax bracket creep, which is placing a growing burden on working Australians.

The move has been backed by a growing chorus of economists, who accuse the major parties of relying on bracket creep to fund irresponsible spending promises.

In a letter to Treasurer Jim Chalmers on Monday, Wentworth MP Allegra Spender and seven other teal independents called for the government to index income tax thresholds to inflation, wages growth or 2.5 per cent – the Reserve Bank’s inflation target.

Doing so would prevent workers footing increasingly higher tax bills as wages rise but tax brackets remain the same.

This “stealth tax” was the result of decades of policy inaction and lack of ambition, Ms Spender told AAP.

As public spending has increased, governments of both persuasions have increasingly relied on bracket creep to pay for it, given the political difficulties of increasing taxes elsewhere or limiting services.

“The truth is, it has suited both major parties to have bracket creep in place,” Ms Spender said.

“It’s allowed them less accountability for their decisions and they get to feel like Santa Claus (when they hand it back periodically in the form of tax cuts).

“This is why I think you have a chance of driving more change if you have minority government, where you have members of the cross bench who are really interested in economic reform.”

By 2035, Australian workers will be responsible for almost 50 per cent of federal government revenue, up from 38 per cent in the 2000s, the letter to the treasurer said.

Meanwhile, wealth inequality is widening between older and younger Australians.

In the high inflation period since the pandemic, bracket creep has been more responsible for the fall in household disposable incomes and living standards than increased mortgage payments due to rate rises.

Using bracket creep to cover increased spending without being up front to taxpayers about how it would cost them in the long run was “anti-democratic”, said economist Steven Hamilton, a visiting fellow at the Tax and Transfer Policy Institute at the ANU.

Ending bracket creep should be the “number one priority for tax reform”.

“Because the system is built with the income tax rising automatically as a share of the economy, if you just leave the system on autopilot, it’s going to get out of balance quite quickly, especially when inflation is high,” he said.

A broad consensus was forming that Australia needed a more efficient and fairer tax mix, Professor Hamilton said.

Former Treasury secretary Ken Henry, Westpac chief economist and former RBA assistant governor Luci Ellis and UNSW economist Richard Holden have also railed against bracket creep.

Asked if he would address bracket creep in the next term, Prime Minister Anthony Albanese instead spruiked his government’s changes to the stage three tax cuts.

“What we did was the gutsiest decision my government has made … to make sure every Australian gets a tax cut,” he told reporters in Sydney.

The Parliamentary Budget Office estimates the benefit to income earners of the stage three tax cuts will be wiped out by bracket creep by 2030.

 

Jacob Shteyman
(Australian Associated Press)