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Bracket creep to put average earners at top tax rate by mid-century

By finance reporter Rebecca Hyam
Etax page on the ATO website.

The PwC report forecasts that Australians earning average wages will be in the top tax bracket by 2039-40.

Accounting firm PwC has warned that, without government intervention, wage increases will see average tax payers in the middle personal income tax bracket forced into the top bracket.

PwC's report shows that average income earners will be the hardest hit, as personal income tax starts to make up a larger share of total tax revenue.

Bracket creep occurs when inflation pushes income into higher tax brackets, resulting in higher income taxes but no increase in real purchasing power.

The managing partner of tax and legal at PwC Tom Seymour says, unless income tax brackets are adjusted, individuals on $80,000 per year earnings will be paying 40 per cent of every additional dollar earned to the Commonwealth by the 2039-2040 financial year.

"As people's incomes go up with inflation, they lose more and more of that to tax in real terms because the tax rates don't increase," he observed.

"It's just an example of where our fiscal regime and, in particular, the tax side of that regime, is under extreme pressure at the moment."

PwC's report also shows that average income earners will move from paying about 21 per cent of their total income in personal tax to 34 per cent in 2039-2040 and 38 per cent in 2049-2050.

Mr Seymour says bracket creep should be an urgent area of tax reform for the Federal Government.

"Personal tax rates don't keep speed with inflation so, for example, once you get above $80,000 in income you're now paying, with Medicare, about 39 per cent tax," he said.

"Now that was the same five years ago, but we all know that $80,000 five years ago bought you a lot more than what it would today."

PwC says another major issue for the budget is the public sector's burgeoning deficit, even though combating bracket creep will reduce revenues and put upward pressure on the budget shortfall.

The report forecasts that, unless drastic changes are made to government spending, combined state and federal government deficits will blow out to more than $600 billion by the middle of the century.

Mr Seymour says urgent reform is needed to prevent this year's expected $34 billion deficit from spiralling wildly in the years ahead.

"Left unchecked, our numbers show that the deficit's going to run out to around a $630 billion number by 2050," he said.

"That sounds like a long way away, but it's a hockey stick effect, because as the debt grows year by year it becomes harder to pin it back, and I think most politicians on both sides are beginning to recognise the urgent need to take action around that."

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