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What is bracket creep and how does it affect your hip pocket?

With stage 3 tax cuts firmly back in the public eye, you may have heard the term "bracket creep" being discussed.
It's not the sole reason behind the introduction of the cuts – it was actually more of a focus for stage 2 of the tax package – but it has been cited as a factor by both the current government as well as the previous Coalition government that introduced the policy.
So what actually is bracket creep, and how does it affect you? Let's take a look.
Busy pedestrian foot traffic at Bourke Street Mall, Melbourne.
Bracket creep impacts everyone. And while it's good for the government, it's not so good for you. (Chris Hopkins)

What is bracket creep?

Bracket creep is when people – particularly low- and middle-income earners – find themselves in tax brackets they were never meant to be in, progressively paying more tax over time as incomes rise with inflation while the brackets remain stagnant.
To properly understand it, we need to look at how our tax system operates.
Australia uses what's known as a "progressive" tax system.
This means the more someone earns, the more tax they should pay both as a lump sum and as a proportion of their earnings.
Exactly how much someone is taxed is determined by a series of brackets, which currently look like this:
That means the first $18,200 someone earns is tax-free, while the next $27,000 is taxed at 19 per cent, the following $75,000 at 32.5 per cent at 30 per cent and so on.
The effect of that is someone taking home, say, $60,000, will pay around about $10,000 in tax – or 16.6 per cent of their earnings – while someone on $90,000 will pay around $20,000 – 21.9 per cent.
Unlike some other elements of the tax system (for example, the beer excise), Australia's tax brackets are not indexed to inflation; they don't change unless the government passes legislation on the matter.
Wages, on the other hand, do change, rising and pushing more people into higher tax brackets every year.
The result is bracket creep, which the Parliamentary Budget Office says is "almost entirely" behind Australia's average tax rate rising from 12.5 per cent in 1959-60 to 23.5 per cent in 2021-22 – although various tax policies have meant that rate hasn't actually changed too much over the last four decades.

How Australia's average tax rate has changed.
A graph showing how Australia's average tax rate has changed from 1959. (Parliamentary Budget Office)
Bracket creep is actually incredibly helpful for governments when it comes to managing the budget.
More residents falling into higher brackets means the government collects more income tax, giving it more funds to either pay off debt or invest into new policies.
But it still needs to be addressed regularly because of its real-world impact on the taxpayers who vote governments in and out.

So how does bracket creep actually affect me?

In a nutshell, bracket creep means you can end up paying more tax even though the value of your income – and therefore your standard of living – hasn't improved.
Take this hypothetical scenario.
Someone with the median of $54,890 in earnings in 2019-20 would have paid $9386.25 in tax – 17.1 per cent of their wage.
Jim Chalmers during a press conference
More residents falling into higher brackets means the government collects more income tax. (Alex Ellinghausen/SMH)
Let's say the median earnings rise by 3 per cent per year for the next three decades, taking that figure up to $133,232.
If the tax brackets didn't change, that same person on the same average salary would be taxed to the tune of $36,792.84 – 27.6 per cent of their earnings.
Because of inflation, the person's real wage wouldn't actually have increased – they'd have the same buying power and same standard of living, but they'd be losing a far greater share of their salary to tax than they would have 30 years earlier.

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