Views on the bill
Bracket creep
2.1
The majority of submitters expressed their general support for the bill,
commenting that the proposed amendments are a step in the right direction to
addressing the effects of bracket creep on the Australian economy.[1]
2.2
Bracket creep is the effect of inflation pushing taxpayers into higher
income tax brackets. Deloitte provided the committee with an explanation of the
nominal and real components of bracket creep and their differential impact on
taxpayer income:
Overall revenue gains from bracket creep can be divided into
two components:
-
A nominal component which occurs
as wages rise with price inflation, thereby increasing average tax rates even
if real wages are going nowhere.
-
A real component, which occurs
when wage rises outpace price inflation, shifting taxpayers even further into
higher tax brackets. This type of bracket creep is a natural feature of a
progressive income tax system.
The first form of bracket creep generates a cut in real
disposable income over time, whereas the second form of bracket creep involves
a sharing of real wage growth between taxpayers and governments.[2]
2.3
Not accounting for the measures in the bill, an individual earning an
average fulltime ordinary wage ($1516 per week[3],
just under $80 000 per annum) would soon be pushed into the second highest
marginal tax rate (from 32.5 to 37 per cent).[4]
This increase in the average earner's tax burden has the effect of reducing
their purchasing power and diminishing productivity by discouraging
participation in the economy.[5]
2.4
The Business Council of Australia commented on this effect:
Personal taxes influence decisions to work, save and invest.
The personal income tax system influences decisions to move from welfare to
work, to work additional hours or seek promotion, and to work in Australia or
overseas. High personal tax rates that cut in at relatively low income
thresholds mean that people may choose not to work overtime or seek promotion.[6]
2.5
Figure 2.1 illustrates the imminent shift into the next tax bracket that
would affect average fulltime ordinary wage earners in the absence of the
amendments proposed in the bill.
Figure 2.1—Marginal tax rate paid at different levels of
income[7]
![Figure 2.1—Marginal tax rate paid at different levels of income](~/media/Committees/economics_ctte/IncomeTaxRelief/c02_1.gif)
2.6
In addition to the detrimental effects on workforce productivity, high
marginal tax rates on personal income encourage the use of tax planning
arrangements as individuals seek ways to reduce their taxable income.[8]
Skewed benefits
2.7
A number of submitters expressed concern that the greatest benefits
derived from the proposed amendments will be delivered to high income earners.[9]
For example, the Australian Council of Social Service commented that the
proposed tax relief is 'targeted towards individuals in the top 20% of
taxpayers'.[10]
2.8
Moreover, some submitters argued that high effective and marginal tax
rates disproportionately hurt low and middle income earners.[11]
This is due to the interaction between the tax and transfer systems and its
effect on take-home income. Taxpayers on lower incomes are expected to
experience greater challenges as a result of bracket creep, with those on
incomes between $30 000 and $37 000 affected the most.[12]
The Business Council of Australia emphasised this issue:
Effective marginal personal income tax rates can exceed 80
cents in the dollar because of the withdrawal of benefits as incomes increase,
creating a barrier to people wanting to enter the workforce.[13]
2.9
Some submitters also raised concerns that the proposed measures may be
funded by spending cuts to social security payments and services on which low
and middle income earners rely, exposing these groups to further disadvantage.[14]
The Australian Council of Trade Unions highlighted this concern:
If the government proposes to fund personal tax cuts by
cutting expenditure on services such as health and education, families on low
and middle incomes will lose out – receiving only a 'sandwich and a milkshake'
tax cut in exchange for poorer services and higher out-of-pocket costs for
health and education.[15]
2.10
The committee notes the concerns raised with regard to the scope of the
amendments in the bill. However, the committee reiterates that the proposed
amendments are part of a suite of measures aimed at boosting the economy for
the ultimate benefit of all Australians.
Need for more holistic tax reform
2.11
While generally supportive of the personal tax relief that the proposed
measures will bring, most submitters also promoted a need for a more holistic
approach to tax reform.[16]
2.12
Submitters advocated for bracket creep to be addressed more broadly, suggesting
that any changes to marginal tax rates should take into consideration their
overall interaction with the transfer system.[17]
The Business Council of Australia underlined this view, arguing that 'without
broader change, people on lower incomes will be left worse off after tax,
simply because their wage keeps pace with inflation'.[18]
2.13
The Australian Council of Social Service proposed that more holistic
reform could also be achieved by:
...closing shelters and loopholes in the personal tax system,
as has been done in the past. This would improve fairness because more people
would actually pay tax at their legislated tax rate. Under the present system
'the many' have to pay more to offset revenue losses from the tax avoidance
activities of 'the few'.[19]
Preparing the economy for future challenges
2.14
Stakeholders also highlighted that the Australian economy is facing a
number of emerging challenges that pose an imminent risk to the effectiveness
of Australia's tax system. An aging population is one such challenge. The
Business Council of Australia emphasised this point in their submission:
Like many industrialised countries, our population is ageing.
An older population will drive increased government spending while reducing
labour force participation and thus the capacity to pay.
...
The personal income tax base will narrow further – if income
tax maintains its current share of total taxes (and the overall tax burden is
not significantly lower), this will mean a significantly increased burden on
future income earners.
With an ageing population, we cannot afford a tax system that
discourages working.[20]
2.15
The Business Council of Australia identified Australia's increasingly
globalised labour market as a further challenge to Australia's economy:
Workers, particularly highly skilled ones, have become
increasingly mobile over recent decades. Immigration can increase the size of
the workforce, and also bring in new skills, ideas and connections that can
ultimately improve productivity and economic growth.
As labour mobility increases, tax differentials increasingly
influence worker decisions about where to locate.[21]
2.16
The committee is mindful of these challenges facing the Australian
economy and is confident that the proposed measures will contribute to
curtailing the risks posed by these factors.
Committee view
2.17
Overall, the committee notes that the majority of submissions supported
the income tax relief measures proposed in the bill, commenting that the
amendments are a step in the right direction to addressing the effects of
bracket creep on the Australian economy.
2.18
While acknowledging the particular concerns raised by submitters, the
committee considers the proposed amendments to be a necessary step toward
providing further tax relief for working Australians.
2.19
As well as maintaining the progressivity of the tax system, the
committee is confident that the bill will positively influence taxpayer
decisions to work, save and invest by offering rewards for effort and creating
better incentives to work. The committee is also confident that the bill will
better align the tax system with the emerging challenges Australia's economy
will face in the years to come.
2.20
The committee does recognise, however, that bracket creep affects
taxpayers at all levels of income and that future tax relief measures may
benefit from broader consideration of this issue.
Recommendation 1
2.21
The committee recommends the Senate should pass the bill.
Senator Jane Hume
Chair
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