Politicians have failed to adjust income tax brackets for inflation since they were introduced in 2010. This means you end up paying more tax each and every year, even if you are not actually getting any richer. See how much more tax you are paying because of the inflation tax:
Average tax rate
The tax you pay now:
$xxx
xx%
The tax you would be paying without the inflation tax:
$xxx
xx%
You are being robbed of $xxx per year because of the inflation tax.
When inflation occurs, the price of goods and services increases meaning that an individual who earns a set income now has less purchasing power. When wages rise in line with inflation, purchasing power (i.e. real income) remains the same.
However, as tax rates are calculated based on the actual dollar figure received (i.e. nominal income), the on-paper rise in your wages means that a proportion of the nominal increase may push you into a higher tax bracket, or will mean that a greater proportion of your income is taxed at a higher rate. This results in you paying more tax at an overall higher average rate, even when you are no better off in real terms. This effect is known as inflation tax, bracket creep or fiscal drag.
What’s the solution?
The solution to stop the inflation tax is simple. When inflation occurs, tax brackets should be adjusted upwards by the same percentage as the inflation rate over the past year.
The table below shows how our income tax system would work if this policy had been in place since our current tax brackets were first implemented.
This adjustment (called indexation) should occur yearly and should be automatic without the need for direction from a Minister. Making these adjustments subject to approval by a Minister makes it too easy to hike taxes by stealth with less scrutiny than other tax increases.
How would scrapping the inflation tax change income tax brackets?
Our current income tax rates were set in 2010*. If our tax brackets were adjusted for inflation from when they were first introduced, here’s how they would look:
Tax Rate
Current tax bracket (introduced Q4, 2010)
New tax bracket (inflation adjusted)
10.5%
$0 – $14,000
$0 – $18,583
17.5%
$14000 – $48,000
$18,583 – $63,713
30%
$48,000 – $70,000
$63,713 – $92,915
33%
$70,000 – $180,000
$92,915 – $204,787
* 39%
$180,000 and over
$204,787 and over
*The table above adjusts the $180,000 figure only for inflation that has occurred since that tax bracket was introduced in 2021.
The video below explains how the inflation tax works
A graduate nurse earning an income of $73,566 per year is paying $2,392 more in tax per year because of the inflation tax.
A full-time minimum wage worker is paying $321 more in tax every year because of the inflation tax. If they choose to work one or more additional hours per week, or get a pay rise of 40 cents or more, they will be pushed into the 30% tax bracket meaning that for every additional dollar they earn they will pay 30 cents in tax.
A vet with a salary of $120,000 is paying $2,972 more in tax per year because of the inflation tax.
Frequently Asked Questions:
Does inflation tax only affect people whose income increase pushes them into a new tax bracket?
What are the economic effects of the inflation tax?
Is indexing tax brackets to inflation difficult or bureaucratic to administer?
Is indexing tax brackets expensive?
What if the Government needs extra tax revenue?
Will indexation mean that we are stuck with the current tax system adjusted for inflation?
Will indexation mean that those on higher incomes are permanently stuck paying a significantly larger share of the tax burden?
Is indexation of tax brackets a popular policy?
Sign the petition
I call on all political parties to axe the inflation tax and commit to automatically adjusting income tax brackets for inflation every year.
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