The tax cuts announced in yesterday’s Budget essentially involve handing back bracket creep. But how much bracket creep? The threshold for the main (30 cent) tax bracket has been raised by 8 per cent from $20000 to $21600. If you take the common definition of bracket creep ‘inflation pushing people into higher tax brackets’ and assume inflation is running at about 2 per cent per year, that would mean the cuts gave back four years worth of bracket creep.
But, as the Treasurer is happy to point out, real incomes are rising. If the ratio of income tax to national income is to be held constant, tax brackets must be adjusted in line with increases in nominal income per person. At the income levels we’re looking at here, this basically means movements in average weekly earnings, which have been growing at 4 or 5 per cent per year lately, depending on the measure you use. So on this definition the tax cuts offset between eighteen months and two years worth of bracket creep.
The top bracket wasn’t adjusted at all, so those on incomes above $50 000 didn’t get much relief from bracket creep this time, however, you mention it. But they (or rather we) have done pretty well under this government, with big cuts when the GST came in and the halving of capital gains tax, as well as the absence of any serious attack on tax avoidance through trusts and companies.
Update 15/5 The last para of this post was completely wrong. All the thresholds were adjusted. The 42 per cent threshold was increased from $50,000 to $52,000 and the 47 per cent threshold from $60,000 to $62,500. Both are about 4 per cent, equal to two years inflation or one years wage growth.
John Quiggin 
I have a question: Has anyone ever calculated what the budget deficit/surpluse situation would be today if the settings from the last Labor budget, in 1995, had remained in place? Given bracket creep, and the fact that the GST package was revenue negative, I wonder how they would compare.
No government has been game to index the brackets for inflation.
I’m surprised you are blogging on this topic since you favour more tax not less. Bracket creep has been a hobbyhorse of us ‘lower tax’ types for as long as I can remember.
If governments had indexed brackets rather than shaving rates we’d still have a top rate of 60%
I’m not a fan of bracket creep because I think decisions to raise taxes should be explicit rather than implicit.
This is partly because I think democratic processes should be transparent and partly because I think that sneaky increases in taxes are not politically sustainable in the long run
The area where tax cuts are needed is where people are on Government payments and are wither working part-time or thinking about working full-time. The MRT is sometimes over 100%.
Family tax credits would not only help here but also with reducing the minimum wage over time alah the five economists.
It seems to me this would have the greatest economic and social impact!
homer is right, there should be upward envy at the bottom of the income curve, not downward…
why no government implements a smooth curve for taxes, instead of brackets is beyond me… is a formula any harder to calculate than a lookup table…
I don’t understand how the number of brackets (ie a smooth curve means heaps of brackets) makes the slightest difference in terms of incentive etc.
I still like Professor Kim Swales’ idea of tax credits on GST (see http://www.faxfn.org for some of his material).
c8to, income tax payable in Germany is calculated as a smooth curve (a quadratic function).
Yes, and up until 1972 we had in excess of 30 brackets in an attempt to approximate a quadratic function.
We actually had threshold indexation under the Fraser government, introduced as part of a pre-election budget. It lasted a total of six months – soon after the election it was discovered to be a non-core promise.
Now don’t get me onto the 5 economists plan – I’ll bore you shitless. I think it rests on some very rosy estimates on the likely effect on actual wages paid of a pause in awards, and a mildly rosy estimate of the wage elasticity of labour demand. And if you do want to boost returns to work there are probably better instruments than an EITC in an Australian context – but that’s a long story.