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Bracket creep: How to get the answer you want

December 23rd, 2015

NATSEM recently released modelling showing that discretionary tax cuts have more than offset bracket creep since 2005 (that is, taxes are lower than if the income tax scales had been indexed to the CPI or a wage index). The Centre for Independent Studies replied with a study pointing out that you get the opposite conclusion by looking at the period since 2013. Why 2013?

We chose 2013 as the starting year because this is when the last change to tax thresholds occurred

Well, yes. If you pick a period in which there have been no discretionary tax cuts, you will certainly find that discretionary tax cuts have not outweighed bracket creep. As author Michael Potter observes

This shows the importance of the starting year.

There’s no need to check the CIS numbers: given the setup, only one answer is possible.

Correction Michael Potter advises that the CIS study includes the impact of the tax changes in 2012-13, making it possible in principle that these could have offset bracket creep. But the 2012-13 changes weren’t a general tax cut aimed at offsetting bracket creep. They offered small tax cuts for low income earners to offset the very modest impact of the carbon price/tax. These were clawed back by higher marginal rates so that upper income earners (appropriately) bore the full cost of the carbon price. The key point, stated below, is that the Howard-Rudd tax cuts introduced after the 2007 election were so large that they have more than cancelled out all the subsequent bracket creep.

Addressing the issue more seriously, the flattening of tax scales under the Howard-Rudd tax cuts, combined with weak growth in nominal wages means that bracket creep is operating very slowly. So, the reduction in the revenue share of GDP driven by those tax cuts remains in effect nearly a decade later.

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  1. Jim Birch
    December 23rd, 2015 at 17:18 | #1

    If they did the calculation for as annual series it would be easier to pick a preferred policy outcome.

  2. Newtownian
    December 23rd, 2015 at 18:01 | #2

    CIS’s logic reminds me of that used by climate change denialists.

    But really its a problem with models more generally. In theory models can provide much insight but only if they are developed and their results reported in good faith and even then their accuracy is often at best order of magnitude. On top of this the way they are used in the public sphere is often part of rationalising an ideology or for supporting a scam.

    In respect to scamming one recent favorite of mine was the real estate industry’s use of projections to make claims about housing growth without including CPI inflation.

    But the best is the machinations of the investment people in charge of superannuation. On top of playing ‘pick your starting point’ which given the roller coaster rides over the decades is an excellent way to get inputs for proving any trend, they intimate by presenting ‘past trends’ where the future will go when this is a dodgy position.

    Though I am at heart a Bayesian and hence believe the past can inform on the future within limits it annoys me greatly as anyone can see the future is an undiscovered country in so many respects especially when you recognize how quickly the world is changing and that not only us semi retired schmucks but the economics community dont understand the full bag of interactions either beyond perhaps the next few months.

  3. 2 tanners
    December 23rd, 2015 at 19:41 | #3

    CIS has failed to show year-on-year improvements in its methods, financial governance, reduction in error rates or scandals attached to the organisation IN ANY YEAR in my research period. Base year is 2015, as this gives us up-to-date reporting and prevents the CIS from being misjudged for mistakes in its far-off past.

  4. December 23rd, 2015 at 21:30 | #4

    The cynicism is astounding. No one should ever listen to them again after that prize piece of sophistry.

  5. James Wimberley
    December 23rd, 2015 at 22:04 | #5

    “The Centre for Independent Studies”: that’s what you get when you privatise the Ministry of Truth.

  6. m0nty
    December 23rd, 2015 at 22:26 | #6

    Hmm, doesn’t the setup involve one discretionary tax cut (the one in 2012/13), not zero? I agree that the sample size is skewed and the point they are trying to make is moot, nevertheless.

  7. John Quiggin
    December 24th, 2015 at 05:12 | #7

    @m0nty

    I read carefully, and thought they had gone after the tax cut. But, leaving aside the mootness, the change in question was the compensation for the carbon tax/price, which was specifically targeted at low income earners, not at bracket creep.

  8. December 24th, 2015 at 12:32 | #8

    As the author of the quoted article, I have a few responses to comments. I will ignore the ad hominem comments.

    Of course we chose to model bracket creep since the last discretionary change in thresholds, that is the whole point. Discretionary tax changes can sometimes make up for bracket creep, but obviously they haven’t since 2012-13.

    If you want a more detailed explanation of the reasons for why we chose 12-13, refer to my article (also linked above): http://www.businessspectator.com.au/article/2015/12/23/economy/dont-believe-income-tax-fairytale

    Re Prof Q’s argument that the costs of bracket creep are small with low inflation, our modelling shows the average cost is $1,180 per taxpayer in 2018-19. I don’t think this is small.

    Perhaps of more interest to readers of this blog, we confirm the arguments of many others (including Martin Parkinson, Deloitte Access and KPMG) that bracket creep is (broadly) regressive.

    Re John Q’s post #7, if the 12-13 tax cuts weren’t aimed at addressing bracket creep, then this means that bracket creep is worse than in our modelling, not better.

    And a minor point: we released our study before the NATSEM study.

  9. December 26th, 2015 at 00:01 | #9

    @Michael Potter

    I’ve always seen bracket creep as a very positive thing. Politicians will always promise tax cuts. And they’ll usually over promise, and then you don’t get enough tax revenue and you get budget deficits.

    Bracket creep can make up for the oversized tax cuts by gradually clawing back the much needed income. Its done very gradually, and if your nominal income doesn’t increase, you don’t pay any more. Seems like a good thing to me.

  10. December 27th, 2015 at 11:54 | #10

    Re John Brookes. If you like regressive tax increases, such as from bracket creep, then of course you will support an increase in the GST. If you don’t support a GST increase, then you should oppose bracket creep.

    Re John Quggin’s updated original post. Two points: there is a reasonable argument that the 2006 and 07 tax cuts were to offset previous bracket creep, not future bracket creep.

    And Parliament decided on a particular set of tax thresholds in 2012-13, bracket creep since then has subverted that intent, regardless of what tax changes occurred before that year.

  11. December 28th, 2015 at 22:53 | #11

    @Michael Potter

    “If you like regressive tax increases, such as from bracket creep, then of course you will support an increase in the GST. If you don’t support a GST increase, then you should oppose bracket creep.”

    That makes no sense. You only get bracket creep if your income goes up. But a GST increase hits you even if your income does not go up. Like if you are retired and living off your investments which are giving fixed or reducing returns.

    Regarding your argument about whether the 2006 and 2007 cuts were to offset past or future bracket creep, that is just stupid. Maybe it was because of the turtles? You have to raise revenue somehow. One of the ways is income tax. Is there an optimal way of taxing income? Maybe, but surely it is the height of optimism to think that somehow we are at that optimal rate, and so we need to constantly adjust for bracket creep to stay at that optimal rate.

  12. John Quiggin
    December 29th, 2015 at 11:22 | #12

    there is a reasonable argument that the 2006 and 07 tax cuts were to offset previous bracket creep, not future bracket creep.

    In that case, you should have started the analysis earlier not later.

    And Parliament decided on a particular set of tax thresholds in 2012-13, bracket creep since then has subverted that intent, regardless of what tax changes occurred before that year.

    Since the intent was to compensate low income earners for the carbon tax/price (since removed) you would need to present an analysis confined to that group.

  13. December 29th, 2015 at 12:16 | #13

    Michael, it probably would have been best if you had just asked John Brookes if he liked regressive tax increases or not. You see, it is quite possible for someone to see bracket creep as a positive thing while still being opposed to an increase in GST.

    Asking John Brookes what his actual opinion was would have been better, because stating that he must either like or dislike both is what’s called presenting a false delemma. This is something that should be avoided as it is often used by Creationists, crooked politicians, courtiers, and other people who engage in dishonest debate tactics and one certainly wouldn’t want to be associated with them.

  14. TerjeP
    December 30th, 2015 at 04:39 | #14

    Federal government tax revenues are higher than they have ever been. The problem is government spending which has increased faster. It would be nice to blame that on Rudd but the ramp up in spending seems to be a bipartisan affair.

  15. John Quiggin
    December 30th, 2015 at 11:27 | #15

    @TerjeP

    Except in the trivial sense that in a growing economy with inflation nearly all aggregate numbers go up, this is incorrect. GDP has grown faster than revenue while expenditure has grown roughly in line with GDP. That is, the ratio of expenditure to GDP has remained constant, while the ratio of revenue to GDP has fallen.

  16. December 30th, 2015 at 14:58 | #16

    TerjeP, in addition to tax revenues being lower now than they were, at times from 1905 to 1972 Australia had varying forms of military slavery. I presume if one attempted to put a value on income forgone as a result of conscription during World War 2 it would show the Australian goverment capturing a much larger portion of economic production than tax revenue as a share of GDP alone would suggest.

  17. January 1st, 2016 at 15:52 | #17

    John Quiggin :

    there is a reasonable argument that the 2006 and 07 tax cuts were to offset previous bracket creep, not future bracket creep.

    In that case, you should have started the analysis earlier not later.
    There isn’t any strong argument to use any year at all other than 2013. If I should have started my analysis earlier than the most recent tax change, or earlier than 06, how much earlier? 1 year? 2 years? 100 years?
    I don’t know for sure that the 06 and 07 tax cuts were to offset previous bracket creep – and you don’t know for sure that they were to offset future bracket creep. Either approach may be debatable. But something isn’t arbitrary or debatable: the date of the last tax change in 13.

    And Parliament decided on a particular set of tax thresholds in 2012-13, bracket creep since then has subverted that intent, regardless of what tax changes occurred before that year.

    Since the intent was to compensate low income earners for the carbon tax/price (since removed) you would need to present an analysis confined to that group.

    The snapshot for our report does an analysis of the impact for every $500 income band from zero income up to $300,000. Here is the link again: https://www.cis.org.au/commentary/articles/interactive-snapshot-exposing-the-stealth-tax-the-bracket-creep-rip-off
    This does an analysis of the $ and % impact for each $500 income band. I haven’t done an analysis of the increased total tax revenue by income bands.
    A separate point: the 2013 tax changes had almost no effect on tax paid for people earning above $80,000, so bracket creep has actually been affecting those taxpayers since before 2013. But as I’ve argued the only reasonable year to use is 2013, we stuck with that.

    John Quiggin :
    @TerjeP
    Except in the trivial sense that in a growing economy with inflation nearly all aggregate numbers go up, this is incorrect. GDP has grown faster than revenue while expenditure has grown roughly in line with GDP. That is, the ratio of expenditure to GDP has remained constant, while the ratio of revenue to GDP has fallen.

    The current ratio of tax to GDP is around the historical average, and will shortly go above it, largely due to bracket creep: http://www.abc.net.au/news/2015-09-28/potter-australia-doesn't-have-a-tax-revenue-problem/6810346
    It is true that the ratio fell after the GFC, but it has increased to be around historical averages today.

  18. January 1st, 2016 at 15:56 | #18

    Ronald Brak :
    Michael, it probably would have been best if you had just asked John Brookes if he liked regressive tax increases or not. You see, it is quite possible for someone to see bracket creep as a positive thing while still being opposed to an increase in GST.

    I think it is pretty difficult to support bracket creep and oppose a GST increase. This is the point Martin Parkinson made in a speech to the McKell Institute. The video is well worth watching. https://www.facebook.com/mckellinstitute/videos/1241620225854097/

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