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Spring 2003 cover

National Observer Home > No. 58 - Spring 2003 > Editorial Comment

The Serious Matter of Bracket Creep

The phenomenon of bracket-creep (whereby due to inflation incomes move into increasingly high tax brackets, and are hence subject to higher rates of tax) has been known for many years. But it has not received the attention it merits. It has been largely ignored by newspaper journalists and other media commentators, who have interested themselves instead in the fashionable topics of the day.

Bracket-creep has created a very serious threat to standards of living. It enables governments to increase taxation by stealth. It delivers an increasingly large proportion of the national income to the wasteful hands of government.

The longer bracket-creep continues, the closer less well-off taxpayers will come to the maximum (48.5 per cent) tax rate, and the greater will be the proportion of national income that will be taxed at this penal rate.

Anomalously, groups purporting to represent the less well-off have often urged the maintenance of very high tax rates for better-off groups. But this approach (essentially grounded in envy) has backfired against the less-well off, who themselves have been victims of bracket-creep and have lost increasing proportions of their incomes to government.

It has recently been reported that during 2002-2003 household income increased by 3.5 per cent, whereas income tax on individuals increased by 8.6 per cent. The greater part of this disparity is attributable to bracket-creep.

Remedies for Bracket-Creep

Generally, the most satisfactory remedy for bracket-creep is the indexation of tax rates, so that they are automatically adjusted for inflation. In contrast, when governments periodically provide "tax-cuts" (generally for electoral gain), taxpayers receive back far less than they have been penalised in bracket-creep.

Curiously, there is so far limited public pressure for the indexation of tax rates. In the absence of such pressure politicians are happy to have the current position continue, whereby election promises and wasteful government expenditure can be funded automatically, without any need to legislate for tax increases.

However in view of the extraordinary apathy of the electorate, and the absence at this stage of sufficient pressure upon politicians to introduce tax-indexation, a second remedy must be considered. This remedy consists in the regular reduction of the higher rates of tax. These rates are in any event too high, by international standards. Hence an annual reduction of one per cent (that is, by one per cent every year) of the maximum 48.5 per cent rate would be appropriate, until at the highest a 40 per cent maximum rate applies instead. Other higher rates should be reduced correspondingly.

Increasing Taxation and Mr. Peter Costello

The problems of bracket-creep and high taxation are compounded by Mr. Peter Costello. Although Mr. Costello is the Treasurer in a Liberal-National Party Government, under Mr. John Howard, his high-taxation policies and his adoption of onerous taxation regulation are more appropriate to a Labor Party Treasurer. One of Mr. Howard's most serious errors has been to permit Mr. Costello to continue in this office.

It may be expected that the increasing burdens of bracket-creep will not be properly addressed until there is a change of Treasurers. Who would be a suitable replacement? He would need to be a person committed to small government and to the restriction of taxation to reasonable levels. But few of Mr. Howard's ministers fall into this category. Most of them may be regarded as unduly opportunistic, intent upon retaining their high offices, and in no way committed to the protection of the citizen against government imposts.

Two exceptions amongst this depressing group are Mr. Tony Abbott and Senator Nick Minchin. Both of them are prepared to implement policies that would be approved of by the great majority of Liberal Party and National Party voters. They favour a containment of big government, a reduction in government regulation and a relatively low-tax economy in which real standards of living can increase. But most of their colleagues are little better - and in some cases worse - than their Labor Party opponents. In these circumstances it is little wonder that bracket-creep is continuing to erode the standard of living of Australians and to accelerate government spending, regulation and control.

National Observer No. 58 - Spring 2003