Wednesday, 6 April 2016

A lively political debate about tax continues ahead of this year’s pre-election budget.

Recently, GST has been the centrepiece of tax reform deliberations. But with the Prime Minister pouring cold water over any changes to the GST, and state and territory leaders rejecting levying their own income tax, there is now a renewed focus on just how much we should give to the ‘tax man’ each financial year.

Over the decades, income tax thresholds have been adjusted by the government of the day.

In 1950-51 we had 28 tax brackets, with people in the highest bracket (equivalent to $412,000) paying a marginal rate of 180d per £1 - equal to 75c per $1.
In 2014-15 we have 4 tax brackets, with the highest marginal rate paying 45c per $1.

In the first chart below, we look at changes to income tax over the last 65 years. Currency values have been adjusted for inflation (base year 2015) using the Reserve banks inflation calculator. This allows us to look back at what income tax levels used to be and how they've evolved. Click or roll over a bracket to reveal further details (desktop only). Use the drop down to change the income range.

Individual income tax brackets 1950-51 to 2014-15

Individual tax rate per $1 of income (adjusted for inflation, base year 2015)

Bracket creep

In the chart above you’ll notice a thing known as ‘bracket creep’ – simply follow the colours as the brackets move downwards year on year.

Bracket creep occurs when tax thresholds stay fixed and incomes and inflation rise.

Let’s illustrate this with an example: imagine you earned $50,000 in year 1, and inflation for that year is 2%. In year 2 you would need to earn $51,000 to maintain your standard of living (or purchasing power). Luckily, in year 2 your boss gives you a wage increase of exactly $1,000, so your earnings keep pace with inflation, meaning that you can buy all the items you purchased in the previous year.

The tendency here is to think that you are no worse off – but, because the tax brackets affecting your income haven't risen in year 2, you are paying a greater percentage of your income as tax. You are slightly worse off even though your wage has kept up with inflation.

Another scenario would be if an increase in your earnings put you into a higher tax bracket altogether, you then would be paying more tax on your income and you would pay some of it at a higher rate.

The concept of bracket creep is sometimes referred to as ‘taxation by stealth’ by its critics, as it increases everybody's average income tax rate without the government of the day having to do anything.

There was a brief period in the mid to late 1970’s where annual indexation of income thresholds was introduced in order to combat bracket creep. You can see this year on year stability in the above chart from 1976-78 – but it was a relatively short-lived policy.

How much income tax would you have paid in the past?

Enter an income into the text box below and see how much income tax you would have paid in the past. Can you see the effects of bracket creep on your income over the last few years? Once again we've adjusted for inflation (base year 2015) using the Reserve banks inflation calculator.

Income tax paid in 2015
Income tax paid - MORE than 2015
Income tax paid - LESS than 2015
Notes & considerations:

Please note for the sake of brevity this is a simplified calculation about income tax only. It does not take into consideration levies such as the Medicare levy or any other deductions or credits that an individual maybe entitled too when submitting a tax return.
Thanks to the ATO for consulting on the accuracy of historical data