Saturday, February 20, 2016

Bracket creep is code for cutting high-end taxes

I've never complained about being pushed into higher tax brackets. In fact I've been quite pleased.

I've seen it as a sign that I've made it, that I've moved up another notch.

And it has never meant that I've paid much more tax.

Work it out for yourself using the $80,000+ tax bracket. Put to one side the Medicare levy. If you had been earning $79,000 and then got paid $81,000, the tax rate on the last few dollars you earned would climb from 32.5 to 37 per cent.

But that doesn't mean you would pay 37 per cent of your wage in tax, or anything like it. It would mean your total tax bill would climb from $17,222 to $17,917. As a proportion of your (higher) salary it would climb from 21.8 per cent to 22 per cent.

It would be barely noticeable, but it would give you bragging rights.

And the strange thing is it would happen whether or not you moved into a higher bracket. Imagine you had been earning $75,000 and then got $77,000. You wouldn't change brackets but your tax bill would climb from $15,922 to $16,572. As a proportion of your salary it would climb from 21.2 to 21.5 per cent. Tax rates go up as income climbs whether or not people change brackets. The phenomenon shouldn't even be called bracket creep.

It happens because the more we earn, the more the proportion of our salary in the tax-free zone shrinks. "Crossing the threshold" matters symbolically but not practically.

But don't tell the Coalition, or talkback radio.

Here's Ray Hadley on Monday: "It is very hard to explain to people so-called bracket creep ... it simply means that people who were formerly taxed at the lower income rate through no fault of their own go on to the next income rate, taxable rate, and they are paying a lot more tax."

Here's Scott Morrison, agreeing with him: "Next year if you are on the average wage, you are going to go onto the second-highest tax bracket ... if we don't change the personal income tax rates you will end up paying more."

At this point you are probably feeling grumpy. The Treasurer has just told you the average wage is set to sail past $80,000. But your own wage probably isn't. Here's why. Most earners get nothing like the average wage. Right now the average full-time wage is $78,000, but the typical full-time wage is nearer $65,000. The average is pushed up by a comparative handful of high-earning megastars. In the real world three quarters of us earn less than that "average"...

Most are at no risk of crossing into the second-highest tax bracket. Morrison himself says over the next two years it'll be only 300,000 of Australia's 13 million taxpayers. And they'll hardly notice it. Again, don't take my word for it, listen to the Treasurer addressing economists last November:

"Income tax has become the silent tax for many Australians, particularly young Australians. When they go to the automatic teller machine to draw out their cash they do not see, as they do with the GST on their sales receipt, the 19 cents or 32.5 cents or 37 cents or 45 cents that has been deducted in income tax, let alone the extra 2 cents for the Medicare levy. They just take the cash."

Given enough time, bracket creep could hurt. But just at the moment wages are growing at their slowest sustained rate in memory.

Many of us would welcome bracket creep if it meant actually getting a pay rise.

It's as if the Treasurer picked up a script about the dangers of bracket creep and decided to use it just as if it mattered the least, a bit like Eric Abetz warning of a "wages explosion" as wage growth collapsed.

What's worrying is what he plans to do about it. Bracket creep hurts low-income taxpayers more than high income ones, yet Morrison says he is "deeply troubled" by the fate of those about to move into the $80,000 tax bracket. He "may be able to prevent that outcome going forward". It sounds as if he wants to adjust the $80,000 threshold to help them and leave the bottom three quarters of taxpayers alone.

The prime minister assures us that fairness will be at the heart of everything he does about tax. It would be good if Morrison ensured that it was.

In The Age and Sydney Morning Herald