$7,000 ‘stealth tax' hitting Aussies every year: ‘Will become worse'

Yahoo

21-03-2025

Australian couples are paying an extra $7,000 in income tax each year due to bracket creep. Tax experts say the 'stealth tax' is already hitting Aussies hard, with lower and middle-income earners bearing the brunt.
Workers paid $3,500 more in tax last financial year due to bracket creep, with dual-income households paying an extra $7,000 despite the government's revised Stage 3 tax cuts. That's according to a new analysis of Parliamentary Budget Office and ATO figures prepared by the Liberal Party.
H&R Block director of tax communications Mark Chapman told Yahoo Finance bracket creep came about when rising wages and inflation pulled people into higher tax brackets, even where there had been no changes to tax rates and thresholds.
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'If we look at somebody who's on a salary of say $130,000, that person's marginal tax rate is currently 30 per cent, which is the rate that applies up to $135,000,' Chapman said.
'Say the $135,000 threshold remains fixed over the course of the next few years, but she enjoys an annual pay rise of 3 per cent each year.
'In the second year, she'll be earning more than $135,000, which means her top marginal tax rate will now be 37 per cent.'Chapman said the argument was the worker was 'doing the same job" and "hadn't received a promotion' but because there hadn't been changes to tax rates or thresholds, she would be paying tax at a higher rate on part of her income.
'That will continue for each year and it will become worse for each year. For each year thereafter, she'll pay an increasing proportion of her wages at the 37 per cent rate as long as she gets a pay rise each year and providing the threshold doesn't change,' he said.
Forecasts by economist Chris Richardson, released by the Australian Financial Review, found bracket creep could push the average Australian full-time worker from the 30 per cent bracket into the 37 per cent bracket by 2031.
Chapman said both governments tended to leave tax thresholds the same as a kind of 'stealth tax' with most taxpayers not noticing they're paying more tax due to their salary increasing.
Chapman said high-income earners were not affected by bracket creep 'at all' if they had already hit the tax threshold of $190,000 for the highest tax rate of 45 per cent.
'It is certainly an issue for lower and middle-income taxpayers because there are three tax brackets in between the tax-free threshold and $190,000 which people can potentially go through,' he told Yahoo Finance.
'It is certainly a real problem because people's incomes are increasing and therefore they're potentially moving into a higher tax bracket.
'Obviously it's better than not having a wage increase or a wage increase that is less than inflation. You've got to choose the lesser of two evils.'
The federal government's revised Stage 3 tax cuts cut the 19 per cent tax rate to 16 per cent, and the 32.5 per cent tax rate to 30 per cent.
The 37 per cent rate was retained with the threshold increased from $120,000 to $135,000, while the 45 per cent rate was retained with the threshold going from $180,000 to $190,000.
Chapman said this was a 'substantial' increase to tax thresholds but it was a 'one-off hit' when bracket creep was happening 'every year'.
Raising the tax brackets in line with annual inflation could be a 'sensible' step to take, he said, and would effectively give workers a nominal tax cut on July 1 each year.
'The problem is that governments do like fixed tax brackets because each year they drag in more and more people into the higher tax brackets and by and large many of those people don't notice and don't make an issue of it unlike other forms of tax increases which are far more visible,' Chapman said.
Neither Labor nor the Coalition have committed to income tax cuts this upcoming federal election.
Treasurer Jim Chalmers has hit out at shadow treasury spokesperson Angus Taylor's 'dodgy numbers' and said they 'don't include more than $20 billion in tax cuts that Australian workers are receiving in 2024-25 alone'.
Eight independent MPs, including all the Teals, have written to Chalmers to urge the government to index income tax thresholds to inflation.
They argued this would "protect the wages of future generations of Australian workers while removing the bracket creep safety net which governments of both sides fall back on to raise revenue".
Australia is among the 21 OECD countries, out of 35, that don't increase tax brackets to account for inflation or wage growth each year.
Canada, for example, changes its tax brackets every year to adjust for inflation, while European countries like Belgium, Norway and France adjust their tax brackets yearly.Sign in to access your portfolio