Australians are now paying the highest average rate of income tax in more than two decades, raising concerns too much of the tax burden may be falling on Australian workers in their prime.
Author
- Roger Wilkins
Professorial Fellow and Co-Director, HILDA Survey, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne
That's according to the latest annual report from the Household, Income and Labour Dynamics in Australia (HILDA) survey , released today. I am co-director of the survey, which has followed the same people every year since 2001, making it possible to examine how the lives of Australians have changed across several aspects.
Among people aged 15 and over, the average share of income paid as income tax rose to 11.7% in the 2022-23 financial year (up from 10.1% the previous one). For full-time workers, this figure was higher, at 20.3% (up from 18.1%).
This sharp increase wasn't because the federal government hiked income tax rates in 2022-23. It was driven entirely by rising nominal incomes and the fixed thresholds in our tax system - a phenomenon called "bracket creep". Here's why that matters to us all.
Why taxes keep creeping up
In Australia, unlike many comparable countries , the income thresholds at which higher tax rates apply are not indexed to inflation.
This creates an interaction between our progressive tax system with fixed marginal tax rate thresholds and incomes that grow over time - known as bracket creep.
To understand how bracket creep works, it helps to illustrate with a really simple example. Imagine a worker, Mark, who earned A$18,200 in 2013 - right on the level of the tax-free threshold. Mark pays no tax on his earnings that year.
If Mark's wage went up with annual pay rises that keep up with inflation, by this year he'd be earning $25,662. This looks like a higher wage, but remember: inflation means it has roughly the same purchasing power as $18,200 gave Mark back in 2013.
Meanwhile, the tax-free threshold is still the same: $18,200. So he's now being taxed at 16% on every dollar earned over this threshold (although his tax is reduced by the Low Income Tax Offset ).
This plays out for people on higher incomes too, as their income pushes further into and above brackets with a higher marginal tax rate .
Setting the thresholds at fixed dollar values means even if incomes aren't growing in real terms, the share of people's income going to tax tends to rise as over time, as the nominal "dollar amount" of their incomes increase.
Between 2011 and 2023, the average household income before tax grew by 48% in nominal terms (or dollar amount). But it only went up 10% in real terms - what people could afford to buy.
Tax getting a bigger slice of the pie
While Australians currently face the highest average tax rates seen since the HILDA Survey started in 2001, the trend in that time hasn't always been upwards.
Between 2006 and 2011, the average tax rate for full-time workers actually fell, from 19.4% to 15.7%. Since 2011, however, the trend has overwhelmingly been upwards.
Periodically, the government does adjust the income tax schedule to counteract the effects of bracket creep. Since 2011, there have been three significant changes to the thresholds and tax rates. These took place in the 2012-13, 2020-21 and 2024-25 financial years.
However, as experience between 2011 and 2023 demonstrates, these periodic changes do not guarantee all bracket creep is eliminated.
Despite this, the 2024-25 "Stage 3" tax cuts will have gone some way to reduce bracket creep. My analysis of Bureau of Statistics data on average weekly earnings shows the cuts reduced the income tax share of a full-time worker on the average wage by approximately 2 percentage points (from 23% to 21%).
But without indexation of tax brackets, the trend for bracket creep to raise average tax rates will continue in coming years.
35- to 54-year-olds lose the biggest slice of their income
As the figures below from the new HILDA report show, average tax rates differ substantially by age group.
On average, people aged 35 to 54 contribute the highest share of their income to income taxes.
Those who pay least are those aged 75 and over, followed by people aged 65 to 74.
These differences by age group largely reflect differences in income levels. But the low rates seen for people aged 65 and over also reflect the concessional tax treatment of retiree incomes. Most important is the tax-exempt status of most superannuation of retirees.
More broadly, not all income is taxed equally. Capital gains receive a 50% discount ( and there is no tax on capital gains on the family home ), while there are also a number of other concessions and exemptions.
Keeping the tax burden fair
Why does the rise in the average tax rate on income - particularly income from work - matter?
There is no magic number for the ideal average tax rate. And if we want the government to deliver more services - for example in health care, disability support and childcare - then tax revenue needs to rise to sustainably fund these services.
But there are legitimate questions about how this additional revenue should be raised.
Politically speaking, bracket creep is arguably the easiest way for the government to grow revenue. It happens "automatically", without announcing any policy change.
This does not make it the best way. There is growing concern we are increasingly putting too much of the tax burden on people aged in their mid 30s to mid 50s. We may also be reducing incentives to engage in paid work.
There are many alternatives to bracket creep we could explore. One option could be to reduce concessions that exist for non-labour income, such as from superannuation and capital gains.
The government could also consider increasing revenue from sources such as the goods and services tax, and examine to other sources of tax revenue, such as road user charges, broad-based land taxes and inheritance taxes.
All of these alternatives should all be on the table to achieve a fairer and more efficient tax system.
Roger Wilkins receives funding from the Australian Research Council.
