A new Treasurer and a focus on 'work, save, invest'

September 2015

Recently appointed treasurer Scott Morrison has signaled a renewed focus on reducing spending and encouraging Australians to work, save and invest.

Incoming Treasurer, Scott Morrison, has reiterated the Government's commitment to its Tax White Paper however has also signaled a move from a combative dialogue to a more optimistic one (http://www.afr.com/news/special-reports/afr-national-policy-series/treasurer-scott-morrison-wants-to-unlock-retirees-home-wealth-20150922-gjsrw7), with existing options such as raising the GST, lowering company and personal income taxes still on the table.

Former Treasurer, Joe Hockey, previously said that personal tax cuts were required to prevent 'bracket creep' – that's jargon for what happens when the tax rate thresholds don't keep pace with the increase in earnings and more people are pushed into a higher tax bracket (they get taxed more and potentially lose access to benefits but are economically standing still).

So will the new Treasurer's reforms also include Mr Hockey's tax cuts?

What are the issues around bracket creep?

The last change to tax brackets occurred in 2012, when the tax-free threshold was raised to $18,200.

The Government estimates that in the next two years, more than 300,000 Australians will move into the second highest tax bracket and that by 2025, 43% of taxpayers will sit in the top two tax brackets.

The political problem is that because personal tax rates are a percentage of income, any cut to personal tax rates benefits higher income earners more than it helps lower income earners. Higher income taxpayers earn more therefore the dollar value of the cut is more. As it stands, the top 10% of income earners pay almost half of all personal tax collected – in the 1990s it was closer to 25%.

The Treasurer also points out that in many cases, women returning to work after being on maternity leave are often worse off or no better off once the cost of childcare has been factored in. It's a big issue for many families and prevents women contributing in the workforce.

What are the solutions to bracket creep?

Despite pointing out the issues that bracket creep creates, it seems addressing those problems will be the next Treasurer's problem. The Options Paper on tax reform is due out before the next election, however many pundits and commentators are now looking to the new Prime Minister, Malcolm Turnbull to lead the way on serious tax reform.

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