The final budget figures have come out for last financial year and surprise surprise, we’ve hit record levels of spending and we are back in deficit.

Just rookie numbers. You got to pump those numbers up. Adding $10 billion to the national debt because clearly having a trillion dollars already in debt is and once again we need to talk about a little thing called bracket creep. What it is, why it matters, why politicians love it so much, and the flat out lies that we’re being told by our government about bracket creep and the budget.

Bracket creep is a perfect example of a problem that the government could solve with ease, but they don’t want to because it is more politically advantageous to them to keep applying band-aids that don’t actually fix it, but then they can apply more band-aids in the future. My name’s Topher Field. This is the Topher project and I help busy people like you to make sense of the nonsense that surrounds us. And there is a lot of nonsense when it comes to the budget, the deficit, and tax revenue. I am 100% viewer supported. So, please help me to keep the Topher project going by buying me a coffee via the button at topherfield.net. And if you like my videos, then you will love my books, my DVDs, and my merch, which you’ll find at goodpeoplebreakbadlaws.com.

Now, if you’ve been following me for a while, chances are you’ve heard me talk about bracket creep before. But even if that is you, stick around because for the sake of anyone new around here, yes, I am going to cover what bracket creep is and all of that. But at the end of this video, I’m going to show you why the politicians don’t want to fix it and why, in their own words, they would rather keep applying band-aids instead of doing the surgery needed to fix this problem once and for all.

This is the perverse incentives of politics at work.

I talk about that in my book and regular viewers will have heard me say that politicians don’t benefit from fixing problems. They benefit from promising to fix problems and then not fixing them so that they can make the same empty promise again next year. And nowhere is that more true or more obvious than in bracket creep.

What is bracket creep? Well, Australia has what’s called a progressive tax system, which means that the more you earn, the more you get taxed, not just in absolute dollars, but as a percentage of your earnings. We do this using tax brackets. And I’ll illustrate them here with my new best friends, my poker chips.

In Australia, the first $18,200 of your income does not get taxed at all. That’s the first bracket, also known as the tax-free threshold. Then the next bracket of $27,000, more income, gets taxed at 16%. Then the third bracket, which spans income from 45,000 to 135,000 or a span of $90,000, this gets taxed at 30%. And if you’re lucky enough to have earned more than that, the next $55,000 in income is taxed at 37%. And finally, if you’re lucky enough to earn over $190,000 in a year, wouldn’t that be nice? you get taxed at $45,000.

So, what I’ve got in front of me here is a hypothetical $250,000 income. I know we can dream. Just humor me here. And as you can see, as we move up the income tax brackets, the percentage, the proportion of the bracket that is lost to tax, that’s the front row, increases, the total number of chips is the income with the tax from each bracket out in front. So you can see that by the time you get to the highest tax bracket, the pile in front that is tax is almost as big as the pile that is yours to keep.

So, we know from basic math that our average income tax, the overall rate of tax that we’re paying across our entire income is somewhere in between the lowest and the highest tax threshold that we are paying. If I’m being taxed across the tax brackets from 30% from 0% all the way up to 45% then my average income tax is probably 25 to 30% somewhere in that range.

But every year of course I want a pay rise not because I’m greedy. Well okay I’m a little bit greedy but because every year inflation means that my cost of living has gone up. So unless I get a pay rise I will have actually gone backwards financially. So, I negotiate for let’s say a yearly pay rise equal to inflation. All good, right? My income goes up at the same speed as the cost of living goes up. Happy days.

And yes, I am putting aside the fact that the in official inflation figures are flat out lies and the real cost of living is going up at least twice as fast as the CPI is. But let’s not go there for this video. Today, I just want to talk about Bracket Creek. So the new year rolls around and my pay rise of let’s say 3% comes in. Thing is all of that extra money goes here at the top of my income in whatever my highest tax bracket is. Which means in the example of this lucky individual who’s already on 250 grand a year. It’s all going to be taxed at 45% when his average tax rate is in the range of 25 to 30%.

So, this new income which was supposed to be there just to help him keep up with inflation is actually not going to help him keep up with inflation because he’s losing more than the average in tax. And now suddenly an income that only has the same total purchasing power compared to the cost of living is now paying more in tax than it was last year. Now, what happens over time, and probably much more quickly than you might think, is that the percentage of tax on a median income goes up because as that median income increases with inflation, just to keep up with inflation, more and more of that income is in higher and higher tax brackets.

This is true for everyone. Whatever additional income you earn is by definition going into your highest tax bracket.

Even if your highest tax bracket is this one, it’s still the highest tax bracket that you’re in. So, it’s above the average that you’re paying, which means that the overall average tax percentage that you will now be paying on your whole income has gone up slightly every time you get a pay rise. This is what bracket creep is. And it might not sound like it, but honestly, this is actually a pretty big deal.

Late last year, the Parliamentary Budget Office actually came out and said the quiet part out loud that bracket creep was a primary reason why they were expecting the budget to return to surplus in the year 2035. Yeah, I know 9-year projections. Let’s not think about what an absurd exercise in crystal ball thinking these budget projections are and stick with the bracket creep thing.

They say in a roundabout way that if nothing is done then the average income tax rate will rise from 24.9% average across the average income that it was last year. That’s the average across all the brackets across all the workers up to 28.5% in about 9 years. Now that’s an increase of 3.6 percentage points, which as a ratio of the 24.9% average that it used to be is a 15% increase in the amount of tax that the average worker is paying in just 9 years.

And that’ll happen if the politicians do nothing. To say it another way, bracket creep is a built-in annual tax increase that politicians get for free. They don’t have to lift a finger and they don’t get criticized for doing it because they don’t do anything. It just happens. But what they do get is credit for putting a band-aid onto this particular problem.

See, the bracket creep problem could be fixed immediately by simply indexing the income tax brackets to inflation. Yes. Okay. We would have to have honest inflation numbers, but like I said, that’s another story. If the tax laws were adjusted to index the tax brackets so they move with inflation, then bracket creep would disappear instantly. But that’s not what politicians want to do. Oh no, they have a much better idea.

See, if they actually fix a problem once and for all, they only get credit once. But if they keep putting a band-aid on that problem year after year after year, well then they can get credit for it every year, or at least as often as they want to apply another band-aid. Now, perhaps you’re new here and you don’t believe that they would be so cynical. We’ll hear it from treasurer Jim Chalmers himself as quoted in this article by Shane Wright published in The Sydney Morning Herald.

We are enthusiastic about returning bracket creep where we can afford to do that.

We’ve shown that willingness not just on one occasion, not just on two occasions, but on three separate occasions, he said. You got that? They’re not enthusiastic about stopping it from happening in the first place. No, they wouldn’t get enough credit for that. They’re enthusiastic about returning it, meaning giving some of that bracket creep back after they took it.

And because bracket creep happens every year, hey presto, they get to return some every year and get credit for it all over again. Now, what is it that he’s done? What’s he talking about in that quote? Well, he’s spruiking the income tax cuts which they legislated last year before the election which don’t even come into effect until next year and won’t even erase the amount of bracket creep that will have happened just in the meantime between when the legislation was passed and when it will come into effect.

The fact that it won’t even cover the actual bracket creep that happened in that period is a feature and not a bug because that means there’s still an ongoing problem for the treasurer to fix again in years to come. He’s fixed it four times, five times. Why not we fixed it 10 times? Why not fix it once and for all? Politicians don’t benefit from fixing problems. They benefit from promising to fix problems. And their absolute favorite problem is one that they can promise to fix year after year and yet it is still never fixed.

Bracket creep is honestly an Australian politician’s best friend.

Not only does it increase taxes every year without them having to lift a finger, but they can actually get credit for giving a fraction of that tax increase back and then a year or two later or 3 years just before the next election they can get themselves more credit for putting another band-aid on yet again. I don’t know what’s worse, the fact that they play these games with us, or the fact that we let them get away with it. I hope that this video has helped you to understand more about what bracket creep is, why it’s bad, and why our politicians don’t want to fix it, even though they could. Now, if you’ve learned something today, then please pass this video on to someone that you think might be interested.

And if you’d like to help me to keep making more content like this, then please support the Topher project by buying me a coffee via the button at topherfield.net. And if you like my no-nonsense videos, then you will love my non-nonsense books, which are all about government, power, civil disobedience, and human rights, as well as the DVD of my multi-award-winning documentary, Battleground Melbourne, and my t-shirts and hoodies as well. And you’ll find all of that at goodpeoplebreakbadlaws.com.

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