The issue at the centre of the storm is bracket creep \u2014 the invisible economic mechanism where inflation drives wages up over time, bumping everyday workers into higher tax brackets even if their actual purchasing power hasn\u2019t increased at all.<\/p>\n
<\/p>\n
He argued that Australia should move towards a system that automatically indexes tax brackets against inflation \u2014 a system used by other nations including the United States, Canada and Denmark.<\/p>\n
However, his idea has been met with pushback from one of Australia\u2019s most influential think tanks, which says indexing tax brackets would actually make millions worse off.<\/p>\n
Aussies on \u2018unremarkable\u2019 salaries taxed hard<\/p>\n
Mr Harris said he decided to speak out about the income tax issue after becoming fed up by the government\u2019s rhetoric about \u201chelping the little guy\u201d. <\/p>\n
\u201cWhat is glaringly obvious is that in one breath, they give us a $250 handout, but in the same breath they refuse to change these tax brackets,\u201d he told news.com.au. <\/p>\n
\u201cSo inflation is sitting north of 4 per cent, well above the RBA\u2019s target band, and everyone\u2019s wage increases and at the same time they get pushed into these higher tax brackets that aren\u2019t changing. It\u2019s just ridiculous.<\/p>\n
\u201cAnd if you compare us to most other developed economies \u2014 most of them increase their brackets annually based off the rate of inflation. If inflation goes up by 3 per cent then the bracket goes up by 3 per cent so you\u2019re not getting taxed higher.\u201d<\/p>\n
He was left shocked when he ran the numbers on how thresholds have shifted over the last two decades.<\/p>\n
\u201cThe top tax threshold sat at $180,000 back in 2008. Today it sits at $190,000 \u2014 a tiny $10,000 increase across 18 years. Meanwhile, inflation over that same period has risen dramatically, meaning the purchasing power of $180,000 back then is roughly equivalent to around $270,000 or more today,\u201d he said. <\/p>\n
\u201cIn practical terms, someone on a strong but unremarkable salary is now being taxed as if they\u2019re wealthy.\u201d<\/p>\n
Under Australia\u2019s current tax settings, earners making over $190,000 are hit with the top marginal tax rate of 45 cents for every dollar earned above that mark, plus the Medicare levy.<\/p>\n
Approximately 6.4 per cent of Australian taxpayers \u2014 representing a small minority of earners \u2014 hold taxable incomes in the highest tax bracket<\/p>\n
Mr Harris argued that frozen tax brackets allow the Federal Government to pocket billions in extra revenue without ever having to publicly defend a tax hike.<\/p>\n
\u201cThe worst part about bracket creep is that these aren\u2019t treated as official tax rises,\u201d Mr Harris said. <\/p>\n
\u201cGovernments don\u2019t have to announce they are jacking up taxes, so they avoid looking like the bad guy. They just leave the thresholds frozen in the background.<\/p>\n
\u201cThen, when election time rolls around, they hand out small tax offsets or refunds and act like they\u2019re doing us a favour. It\u2019s just a short-term sugar hit for votes, while behind the scenes, static tax brackets continue to take a massive bite out of take-home pay.<\/p>\n
\u201cThey want to give us more stimulus to support the little guy, but in the same breath, they want to tax the life out of everyone.\u201d<\/p>\n
Mr Harris said he believed indexing tax brackets was a solution to the problem, and that it would be easy to implement.<\/p>\n
\u201cThe most important thing we need to do is index our tax brackets to inflation so we aren\u2019t losing out every year as the cost of living keeps rising,\u201d he said.<\/p>\n
\u201cWe also need to increase the bottom tax-free threshold \u2014 currently sitting at $18,200 \u2014 and lift the top bracket further. If you compare us to the US federal system, their peak tax rate is 37 per cent, and that doesn\u2019t kick in until you earn over $US600k ($858k). The gap between Australia and international standards is vast. We are simply overtaxed as a country.\u201d<\/p>\n
He added that the stealth tax squeeze actively harms worker motivation and economic output at a time when the nation is struggling with sluggish growth.<\/p>\n
\u201cThe frustrating part is that governments claim they want to design an economy that supports everyday Australians doing it tough, handing out stimulus packages to help out,\u201d Mr Harris said. <\/p>\n
\u201cWe have ended up with a low-productivity economy per capita, yet we remain heavily reliant on government handouts.\u201d<\/p>\n
Major think-tank pushes back<\/p>\n
However, prominent economic policy experts have hit back at claims that automatic indexation is the silver bullet for Australia\u2019s tax system, warning that such a move could actually leave middle-income families paying more.<\/p>\n
Dr Greg Jericho, chief economist at progressive think-tank The Australia Institute, argued that focusing strictly on recent years misrepresents how tax cuts have historically functioned in Australia.<\/p>\n
\u201cThe problem with looking at tax brackets and deciding whether you\u2019re better off comes down to where you choose your starting point,\u201d Dr Jericho told news.com.au.<\/p>\n
\u201cIf you started indexing tax brackets 20 or 30 years ago, most everyday Australians would actually be worse off today. That is because when governments periodically deliver discretionary tax cuts, they historically overcompensate for bracket creep across lower and middle-income thresholds.\u201d<\/p>\n
Dr Jericho explained that while indexation sounds appealing on paper, political parties tend to hand down larger, lump sum tax cuts every few years that deliver greater relief than simple yearly inflation tweaks would have provided.<\/p>\n
\u201cIf you run the numbers from the end of the Howard government, the top tax threshold does look worse off under the current setup,\u201d Dr Jericho said. <\/p>\n
\u201cBut that\u2019s because John Howard massively increased the top threshold during his term.<\/p>\n
\u201cSo if you look back a few years further, higher earners still came out ahead of inflation overall. Focusing solely on the top tax threshold ignores the fact that every other threshold has generally been overcompensated for inflation over time.\u201d<\/p>\n
How indexation would change how much tax you pay<\/p>\n
Opposition leader Angus Taylor called for action on bracket creep in his budget reply speech, declaring it was a \u201cstealth raid on Australians working hard to get ahead\u201d and that failing to index income tax thresholds with inflation was a form of \u201cstealing\u201d from taxpayers.<\/p>\n
In response, The Australia Institute looked at how indexation would have impacted Australians if John Howard and Peter Costello had introduced it when they were elected in 1996.<\/p>\n
It found tax thresholds are much higher now than if they\u2019d been indexed to inflation in 1996, marginal tax rates are lower now than if indexation had been introduced 30 years ago and that a taxpayer on average weekly earnings is $147 per week better off now than if John Howard had implemented Angus Taylor\u2019s current policy.<\/p>\n
It found a taxpayer on twice the average weekly earnings would be $355 per week better off today.<\/p>\n
Dr Jericho also said that tying tax brackets directly to consumer price indexes takes vital economic levers away from the government and the Reserve Bank of Australia.<\/p>\n
He warned that automated tax cuts every year could inadvertently fuel the fire during periods of high inflation, forcing central banks to react aggressively.<\/p>\n
\u201cIndexation assumes that every single year is a good time for a tax cut, but the real world doesn\u2019t work like that,\u201d Dr Jericho said.<\/p>\n
\u201cTake an environment where the Reserve Bank is actively trying to cool inflation. Broad, automatic tax cuts increase household spending, which directly undermines the RBA\u2019s efforts and could force them to push interest rates even higher. Automatic indexation strips the government of the fiscal tools it needs to manage the broader economy.\u201d<\/p>\n
He argued that rigid tax settings also prevent treasurers from adjusting fiscal policy during sudden global downturns or emergencies.<\/p>\n
\u201cLocking in automatic tax adjustments limits a government\u2019s ability to respond to changing economic conditions or fund public services,\u201d Dr Jericho said. <\/p>\n
\u201cRevenue might be weak, or we could face an unexpected shock. You simply cannot assume every year will bring strong revenue growth where automatic tax cuts won\u2019t blow out the budget deficit.\u201d<\/p>\n
Rather than debating income tax tweaks that predominantly benefit high income earners, Dr Jericho believes the national conversation needs to pivot toward how major corporations and resource exporters are taxed.<\/p>\n
\u201cFocusing heavily on income tax indexation is a bit of a sideshow,\u201d he said. <\/p>\n
\u201cAustralia is actually a low taxing nation by global standards, and our focus shouldn\u2019t be on giving bigger tax relief to higher earners.<\/p>\n
\u201cThe real priority should be properly taxing wealth and resources, rather than dismantling a progressive income tax system that funds essential public services.\u201d<\/p>\n
News.com.au has reached out to the Treasury for comment.<\/p>\n