Pay rises eaten up as tax cuts stop



By Sue Dunlevy    

More than one million Australians will have pay rises eaten up over the next three years because tax cuts are off the agenda for both parties.

Workers earning $34,000 a year will see their tax rate double from 15c in the dollar to 30c in the dollar in the next three years as politicians focus on paying off the nation’s debt.

Workers who earn $73,000 a year, the average total weekly earnings for males in NSW, will be pushed from the 30c tax bracket to the 37c tax bracket by 2013.

It’s called bracket creep and it happens when the tax scales are not indexed to take account of growth in wages.

The age pension and other welfare payments are indexed twice a year but the tax system is never automatically adjusted for inflation or wages growth.

A series of tax cuts by governments over the last decade has protected Australians from bracket creep.

But on July 1 workers received the last of the scheduled $34 billion tax cuts promised by both major parties at the beginning of the 2007 election.

An analysis prepared for The Daily Telegraph using the Melbourne Institute’s tax and transfer simulator at the University of Melbourne showed that, without further tax cuts, in two years 735,000 workers would be paying a higher rate of tax as wage rises pushed them into a higher tax bracket.

Within three years, the time of the next election, 1.14 million Australians will be in a higher tax bracket.

More than half, 585,000 taxpayers, will be pushed out of the 30c in the dollar tax bracket into the second highest tax bracket where they will pay 37c in the dollar.

A further 464,000 workers will see their tax rate double as wages growth pushes them from the 15c tax bracket into the 30c tax bracket.

“I was surprised. It’s hard to believe no one is going to change the tax thresholds,” Nicolas Herault from the Melbourne Institute of Applied Economic Research said.

The modelling assumes wage rises averaging just 4 per cent when in fact wages have been rising by up to 6 per cent in the last five years.

To prevent bracket creep the threshold for the 15c tax bracket would have to rise from $37,000 per year to $41,619 per year by 2013.

The threshold for the 30c-in-the-dollar tax bracket would have to rise from $80,000 per year to $89,989 per year.

The Chartered Practising Accountants Association of Australia said a tax reform plan that would solve bracket creep was on the table but neither side of politics would adopt it.

The Henry Tax review commissioned by former prime minister Kevin Rudd called for a major simplification of the tax system that would see the current $6000 tax free threshold to be lifted to $25,000.

Anyone earning over $25,000 would pay a flat tax rate of 35c in the dollar and there would be only one other tax rate of 45c applying to earnings over $180,000.

CPA general manager Paul Drum said 97 per cent of Australian taxpayers would pay just 35c or less under this proposed system: “There’s less brackets so there’s obviously less chance for bracket creep.”

The Gillard Government said last night it had delivered on three consecutive rounds of personal tax cuts, as promised at the 2007 election and despite the Global Financial Crisis.

“For a worker on a $50,000 salary, this means they now pay $450 less in 2010-11 than last year, and $1750 less than three years ago,” a spokesman said.

“We have also announced and funded policies that will deliver future personal tax relief.

“For example, a $1000 optional standard tax deduction means 6.4 million Australians will get an average $192 extra in their tax refund.

“Labor does not comment on or foreshadow future decisions regarding tax policy.”

Coalition campaign spokesman Andrew Robb said the Coalition was “very attracted” to some of the Henry Tax Review proposals.

“We think tax reform is a significant area that needs to be addressed, just how we do that and when will be addressed before the election,” he said.

Up the creep, without a paddle
2010 earnings … tax bracket … 2010 earnings … tax bracket
$33,000 ………… 15c ………….. $36,000 ………… 15c
$37,119 ………… 30c ………….. $40,494 ………… 30c
$73,000 ………… 30c ………….. $79,000 ………… 30c
$82,114 ………… 37c ………….. $88,863 ………… 37c

Article from The Daily Telegraph, August 3, 2010.