Bracket creep is no reason to bag out Albo’s stage three tax pivot

After Prime Minister Anthony Albanese last week confirmed his government will try to rejig the stage three tax cuts, conservative defenders of Scott Morrison’s original plan have leapt to a familiar line of attack — bracket creep.

They argue that by not removing or shifting the upper tax bands as first envisaged, more Australians will end up graduating into them even if their income has just kept pace with inflation — they’re paying more tax, but their purchasing power is the same.

Opposition Leader Peter Dutton echoed this talking point on Friday, warning bracket creep would be a “grabber of every dollar that you’re earning” under Labor’s plan.

In defence of bracket creep

Treasurer Jim Chalmers responded by emphasising that bracket creep doesn’t just impact those on high incomes — a point backed by sympathetic economists. “We are returning bracket creep where it matters most and where it hurts the most, which is in middle Australia,” he said.

It’s actually the highest income earners that are least affected by bracket creep, as they have no further brackets to graduate into. We could even things up, of course, by adding higher tax bands at the top, but I doubt that’s what Albanese’s critics have in mind.

However, Treasury does estimate Labor’s plan will save approximately $28 billion over ten years, thanks to refunding less bracket creep — though that’s assuming politicians refrain from further tax cuts for a decade (unlikely). But to remove any doubt, teal MP Kate Chaney, among others, has called on Labor to index our tax brackets, so taxpayers don’t need to rely on politicians periodically gifting them back the difference.

But would it really be so bad if they didn’t? There are plenty of other things we could spend the money on. Independent Senator David Pocock has suggested, for instance, using the savings to boost Centrelink payments.

A great many Very Serious Analysts™ will tell you bracket creep is a serious design flaw, an affront to “efficiency”, a procedural unfairness. But the government has no moral obligation to refund it — at least not a greater one than to keep its citizens out of poverty. In fact, in the context of pressing needs for social expenditure, bracket creep can be a perfectly constructive feature of our tax system.

There’s no democratic deficit

A common counter-argument is that bracket creep is sneaky: that if a government wants to raise taxes, it should have to announce each rise so the voting public takes notice. But this takes a narrow view of democratic legitimacy.

Our politicians set unindexed rates for all sorts of things. It’s perfectly legitimate, so long as they do so transparently and we can vote them out later if they “set and forget”. And there are plenty of other important economic factors we don’t index to compensate for inflation — particularly wages, which are automatically indexed in some European countries. Not everything happens automatically; some things, for better and worse, are shifted ad hoc in dribs and drabs.

Given bracket creep’s most fervent critics appear mostly concerned for those on higher incomes, I suspect their real objection is not procedural but substantive; about who pays more, not how.

I suspect they’re also being sneaky themselves — they know that indexing brackets wouldn’t just stabilise our tax base, but that it would erode it. The incentives for politicians to periodically dole out tax breaks wouldn’t go away. They’re irresistible during pre-election pork season. Our social services would simply be less protected from this periodic slashing.

And there is nothing inviolably maximal about our current tax rates — indeed, they’re low by international standards (even our income taxes are, once social security contributions are factored in). Instead of being set in stone, our tax rates should evolve with our social needs.

‘It’s time’ for more tax

In the past decade, voters and their representatives have effectively decided that such needs are growing. For instance, we now expect our government to devote far more resources to ensuring people with disabilities live dignified lives.

The resources required to provide for longstanding systems, such as Medicare, have also increased, partly due to our ageing population, which sees more people actually using social services and relatively fewer working-age people paying for them.

Most economists thus agree Australia has a structural revenue shortfall. It’s being papered over by a temporary boost to commodity prices for now, but when that dries up, a reckoning will come — and Chalmers knows it. He’d be wise to plug the hole by raising taxes on assets, as they’re taxed less than income.

But bracket creep can also play a complementary role. It helps ensure that our tax coffers grow somewhat as spending pressures rise — it’s what wonks might call an “automatic stabiliser”.

In the past, as public demand for social expenditure similarly rose, bracket creep helped bring it to life. In the 1972 election campaign, for instance, Gough Whitlam transparently promised to use bracket creep to finance his nation-shaping reforms. We remain indebted to his decision.

How many social advances might we forgo, and how might we degrade existing ones, if we always preference individual take-home pay over collective goods?

Albanese’s stage three pivot was a brave gamble. If forced to make concessions to get his legislation through Parliament, I hope he navigates a solution closer to Pocock’s. We mustn’t place a permanent handbrake on social spending when we need to accelerate.

Is bracket creep a valid argument against the stage three tax cuts pivot? Let us know by writing to letters@crikey.com.au. Please include your full name to be considered for publication. We reserve the right to edit for length and clarity.