Without tax reform average wage earners will be worst hit by “bracket creep” with their real income falling, a KPMG analysis shows.
The KPMG report, Tax reform for our future success, outlines a case for reforming Australia’s tax system, pointing to unsustainable assumptions by Treasury in its latest economic forecasts for Australia.
“Treasury projections of our underlying deficit released in the Mid-Year Economic and Fiscal Outlook for 2013-14 show deficit projections for the next 10 years,” the report says.
“It is based on a set of rosy assumptions.
“Firstly, it assumes the economy grows at its trend rate until 2023-24. This is based on 33 years of uninterrupted growth, which cannot be viewed as likely.
“Secondly, it assumes fiscal drag, or bracket creep, will continue and there will not be an adjustment to personal tax rates to return part or all of this ‘drag’.”
Fiscal drag is the phenomenon whereby inflation places taxpayers in higher marginal tax brackets.
The Treasury estimates assume that by 2015-16 a person on full-time average earnings will move part of their income into the second highest tax bracket.
As the amount of the taxpayers wages that is in in the higher bracket creeps up, so does the average amount of tax paid as a percentage of their overall income.
The Treasury modelling shows that in 10 years’ time, the average earner will be paying a quarter more tax than now.
If bracket creep is allowed to continue as outlined in the Treasury modelling, it will be unsustainable, KPMG’s national managing partner tax, Rosheen Garnon, said in the report.
“Expecting individual taxpayers to continue to fund government revenue in this way isn’t sustainable,” she said.
“What we need is comprehensive system of tax reform to spread the burden. If we don’t, real incomes fall. Then people will make different choices about how many hours they work, what sort of job they have and how they spend their money.
“If we are to ensure a sustainable future, we need to preserve our capital. This is not simply our environmental capital but our physical, financial, human, institutional and community capital as well.”
KPMG also points to Australia’s ageing population and the likely increase in demand for higher quality services.
