Teals push to index income tax thresholds to inflation (4 Mar 2025)
Article summary: A group of eight independent MPs, led by Allegra Spender, has urged the federal government to index income tax brackets to inflation, arguing that bracket creep is unfairly burdening Australian workers.
In a letter signed by Spender, Helen Haines, Sophie Scamps, and five other teal independents, they warned that without reform, Australian workers would be responsible for more than 46% of federal government revenue by 2035, up from around 38% in the 2000s.
Spender accused both major parties of lacking ambition in tax reform and highlighted that inflation is eroding workers' wages while simultaneously pushing them into higher tax brackets.
The independents propose that tax brackets should be indexed either to inflation or a flat 2.5% per year, in line with the Reserve Bank of Australia’s (RBA) mid-range target. Spender insists this measure should be implemented before determining how to offset the cost, whether through spending cuts or other tax reforms. Based on the RBA’s most recent inflation forecast of 2.4%, the cost of indexation for the 2024-25 financial year would be approximately $3.5 billion.
The independents argue that bracket creep has caused a greater reduction in disposable income for households than rising interest rates and that it allows governments to avoid making responsible fiscal decisions by automatically increasing tax revenue.
Kate Chaney, the independent MP for Curtin, criticised the reliance on taxing workers, stating that freezing tax brackets is the simplest way to prevent further increases in this burden. Fellow independent Zoe Daniel added that bracket creep negatively impacts workers’ lives without delivering an equivalent improvement in their standard of living.
The issue of tax indexation is likely to play a key role in the upcoming federal election, expected by May 17. Prime Minister Anthony Albanese has not committed to addressing bracket creep, instead focusing on his government’s $8.5 billion Medicare investment while criticising Coalition plans for public service cuts. Opposition Leader Peter Dutton has abandoned the Coalition’s previous commitment to further tax cuts for high-income earners and has not announced a replacement policy.
Economists such as Steven Hamilton and Chris Richardson have highlighted Australia’s growing dependence on income tax for budget repair, with Richardson suggesting that Labor’s spending in its first term has delayed tax cuts by five or six years.
Former Treasury Secretary Ken Henry has supported tax indexation, contradicting current Treasury Secretary Steven Kennedy, who has argued that bracket creep has helped slow inflation.
Spender and her colleagues believe that tax indexation will be a major issue in the event of a hung parliament, given the need for greater fiscal discipline. Scamps reinforced this point, stating that taxpayers will inevitably bear the cost of election promises through higher taxes, making it essential to consider reforms to tax brackets.
