The Steady Increase in Income Tax Collections Through Bracket-Creep
Bracket-creep is a phenomenon that has existed as long as graduated income tax and inflation. To the extent that increases in income take place purely through inflation, those increases fall within progressively higher tax brackets. For example, if the average rate of tax paid by a taxpayer is 25 per cent, but increases in his income are taxed in the 47 per cent bracket, his average rate of tax is increased substantially. A persistant failure to correct this process has been a prime source of government revenues both in Australia and in almost all other countries.
Bracket-creep may be negated in three ways. The first and preferable course would be to adopt a flat-rate tax of say 20 or 25 per cent, with a tax exemption of say the first $8,000 of income. The advantage of this course is that it would protect taxpayers at all income levels. Those with higher incomes would see a reduction of tax. Those on lower incomes would be protected from the process by which their real rate of tax is now rising substantially year after year. Further, the adoption of this system would enable a substantial simplification of the entire income tax system, which has been so increased in complexity during recent years that it is incomprehensible to all but a few. Sources of opposition to a flat-tax system are, first, governments and bureaucrats who would lose a relatively concealed method of increasing tax revenues, and, secondly, those motivated by an envy factor. Envy of those with higher incomes than the envier's has long been an important factor in tax policy, which, indeed, has afflicted many academics and public service policy advisers.
The second way of negating bracket-creep involves regular re-adjustments of the income tax brackets in order to overcome the effects of inflation. A problem with this course is that governments and bureaucrats have an interest in eschewing it, and that re-adjustments are irregular and inadequate. They have tended in Australia to be made for electoral reasons: in order to safeguard or increase its popularity a government may announce "tax cuts" with an atmosphere of generosity, whereas in truth only a small proportion of covert tax increases is being negated.
A recent example of fraudulent propaganda of this kind was seen in Mr. Peter Costello's "tax cuts" of 2000, which did no more than negate the effects of bracket-creep over a short period and which permitted further bracket-creep. It was reported in May 2000 in the Melbourne "Herald Sun":1
"Last year Mr. Costello predicted personal taxes would fall from $78.2 billion in 1999-2000 to just $69.5 billion this financial year as the personal tax cuts started to bite. In reality, the latest estimates show the personal tax take stayed almost steady at $76.8 billion.
But in the coming financial year personal income tax will soar much higher than it was before last year's tax cuts to $82.8 billion as inflation pushes more workers into higher tax brackets.
The Medicare levy will also increase by 5.4 per cent to $4.86 billion – well ahead of the expected rise in inflation."
The third method of negating bracket-creep requires an amendment of the income tax legislation so as to adjust automatically (and without any need for government action) the various tax brackets by reference to inflation. This course would involve every year an automatic recalculation of tax brackets so that the real rates of tax are maintained. In other words, an income of a greater nominal amount but the same amount in real terms as that of the preceding year would be taxed at the same total rate.
Automatic indexing is clearly very desirable, in the absence of a flat-rate tax or some other preferable system. Why is it not implemented? The answer lies quite simply in the lethargy and apathy of taxpayers. Many taxpayers are ill-informed; many do not care sufficiently. The consequence is that bracket-creep remains a highly-effective device for the illegitimate transfer of money from citizens to government: another example of the truism that those who are unprepared to defend themselves are taken advantage of by others.
National Observer No. 49 - Winter 2001