Middle-Income Earners to Face Higher Tax Bills Due to Bracket Creep, According to PBO

A new analysis conducted by the independent Parliamentary Budget Office (PBO) has revealed that low and middle-income earners in Australia will be hit with higher tax bills over the next few years due to bracket creep. It is estimated that the median income earner will have to pay an extra $5,000 in taxes during this period.

The stage 3 tax cuts, set to be implemented in July, will introduce a 30% tax rate for incomes between $45,000 and $200,000. However, the PBO analysis indicates that these cuts will provide minimal benefit to those affected, as individuals earning less than $45,000 will not receive any reduction, while those earning above $200,000 will receive a tax cut of $9,075.

The government argues that bracket creep justifies the implementation of these tax cuts. However, the PBO analysis shows that stage 3 does not address bracket creep evenly. Those earning between $150,000 and $200,000 will see most of their bracket creep returned by stage 3 by 2026-27. Conversely, individuals earning under $75,000 will experience a significant increase in their tax bills due to bracket creep but will receive limited benefits from stage 3.

It is important to note that these figures do not take into account the stage 1 and 2 tax cuts that were implemented from 2018-19 onwards, providing an additional $1,080 per year to individuals earning between $48,000 and $90,000.

Bracket creep occurs when the income tax brackets are not adjusted to account for inflation. As a result, taxpayers with unchanged real income end up paying a higher proportion of their income in taxes over time.

The PBO analysis also includes an updated estimate of the cost of these tax cuts. It is now projected that these cuts will redistribute $324 billion from the federal budget to taxpayers over the next decade, $10 billion more than previously anticipated. This increase is attributed to higher-than-expected incomes.

Furthermore, the analysis reveals that approximately three-quarters of the tax cuts will be received by the top fifth of earners, with two-thirds going to men.

In response to these findings, Acting Greens leader Mehreen Faruqi and economics spokesperson Nick McKim have written a letter to Treasurer Jim Chalmers urging for the tax cuts to be scrapped. Prime Minister Anthony Albanese, however, has stated that the cuts will proceed as planned starting in July, although he has not ruled out the possibility of redesigning them.

The Labor caucus is scheduled to meet in Canberra on Wednesday to discuss potential options for providing further relief to the cost of living.