Bracket creep means one million Australian workers’ pay more tax.

MORE than one million Australians will have pay rises eaten up over the next three years because tax cuts are off the agenda for both parties.

Workers earning $34,000 a year will see their tax rate double from 15c in the dollar to 30c in the dollar in the next three years as politicians focus on paying off the nation’s debt.

Workers who earn $73,000 a year, the average total weekly earnings for males in New South Wales, will be pushed from the 30c tax bracket to the 37c tax bracket by 2013.

It’s called bracket creep and it happens when the tax scales are not indexed to take account of inflationary growth in wages.

The age pension and other welfare payments are indexed twice a year but the tax system is not automatically adjusted for inflation or wages growth.

A series of tax cuts by governments over the last decade has protected Australians from bracket creep.

But on July 1 workers received the last of the scheduled $34 billion tax cuts promised by both major parties at the beginning of the 2007 election.

An analysis prepared for The Daily Telegraph using the Melbourne Institute’s tax and transfer simulator at the University of Melbourne showed that, without further tax cuts, in two years 735,000 workers would be paying a higher rate of tax as wage rises pushed them into a higher tax bracket.

Within three years, the time of the next election, 1.14 million Australians will be in a higher tax bracket.

To prevent bracket creep the threshold for the 15c tax bracket would have to rise from $37,000 per year to $41,619 per year by 2013, and the threshold for the 30c-in-the-dollar tax bracket would have to rise from $80,000 per year to $89,989 per year.

The Henry Tax review commissioned by former prime minister Kevin Rudd called for a major simplification of the tax system that would see the current $6000 tax free threshold to be lifted to $25,000.

Anyone earning over $25,000 would pay a flat tax rate of 35c in the dollar and there would be only one other tax rate of 45c applying to earnings over $180,000.

That sounds like a pretty good idea to me. It’s a pity the government of the day commissioned this tax review and then rejected most of its suggestions.