Written by Satvik Sharma

To say Australians are currently facing it tough is an understatement. With 7% inflation rates and interest rates at their highest levels in a decade, families are being squeezed with skyrocketing costs all while their savings deteriorate in real value faster and faster. And the impacts of inflation are not just limited to families, with the job market tightening as businesses slow down hiring and consider layoffs due to rising costs forcing belt tightening. Inflation is a disease, an insidious disease that historically has destroyed societies and eliminated the entrepreneurial drive that leads to wealth and productivity.

During such dire circumstances, it is only natural that Australians would ask for higher wages and profits. With the RBA having $650bn worth of assets on its balance sheet, all paid for by money created from thin air, naturally Australians would want to shield themselves against inflation by demanding higher wages in line with increasing prices. This is something that is occurring, as inflationary expectations have adjusted to the current high inflation environment we live in, with the December quarter seeing a 10.4% increase in nominal wages.

However, our current tax system punishes employees for seeking out high wages, even if it is to simply compensate for the effects of inflation. Australia has a progressive tax system, predicated upon the concept that higher income earners should pay progressively more tax the more they earn. With different tax brackets, individuals with higher incomes will see them landing in higher marginal rates of tax, to account for their higher income status. However, and crucially, the thresholds at which someone enters a new marginal rate is fixed in legislation, with the real value of such thresholds decreasing every year due to inflation, meaning that anyone who asks for a pay rise runs the risk of ‘creeping’ into a new tax bracket.

It is obvious that bracket creep is fundamentally unfair, as it goes against the purpose of a progressive tax system. Why should ordinary hardworking Australians be forced into higher tax brackets simply because they ask for a pay rise in line with inflation? They haven’t increased their income in real terms, they still would have the same access to goods and services as the previous year. It is simply that the value of money has reduced due to the Government’s mishandling of monetary policy, and Australians have to bear the consequences of the result.

What I propose is a simple solution to the problem of bracket creep: the indexation of tax brackets to inflation. No longer would Australians be punished for asking for a pay rise that matches inflation rates, Australians can still retain the real value of their income without being logged with unfair additional taxes resulting from higher inflation. We may have not felt the effect of inflation and bracket creep in the pre covid world of stagnant wages growth and demand, but with inflation skyrocketing to 7%, Australians have had a real taste of the destructive force inflation is.

Moreover, indexation will force governments to engage in fiscally responsible budget management. The recent budget is a case in point, despite there being a $41bn revenue windfall due to rising prices, the latest budget has a forecasted surplus of only $4bn, with deficits expected to continue. If government spending is rising at such a rate that additional revenue being raised by bracket creep is not able to contain budgetary pressures, what limit is there then to reckless government spending. With lower revenue, governments will be forced to scale back on the bloated size of government.

Political parties also won’t be able to claim the triumph of cutting taxes simply to line up with inflation. Parties should be bold in their economic policy, and by allowing parties to gain political points by cutting taxes simply to match back up with inflation, parties would be more emboldened to engage in real reform. Cutting taxes is excellent, but parties should be bigger and bolder about tax reform, rather than simply engaging in menial taxation changes that simply account for bracket creep.

It is important to note that this is not a solution to inflation. Inflation is a disease caused by poor monetary policy, which oftentimes is instigated and made worse by the inefficiencies of big spending governments and out of control budgets. For Australia to return to a low inflation environment where households are not saddled with constantly rising prices, we will have to address the underlying issues creating inflation.

 However, the indexation of tax brackets to inflation does help alleviate some of the symptoms caused by poor economic management. Inflation is a tax without representation, taxing savings, the real value of our dollar and by directly increasing the revenue we pay to Canberra through bracket creep. At least the third form of tax would be eliminated by indexing tax brackets to inflation. We must do whatever we can to help families during the cost-of-living crisis, and the indexation of tax brackets is a morally fair, and economically sensible policy that should be implemented.

Satvik Sharma is the Treasurer of the University of Sydney Conservative Club. He is also a Councillor on the University of Sydney Student’s Representative Council, holding office-bearer positions as Environment and Global Solidarity officers. Satvik also sits on the University of Sydney’s Academic Board, and he sits as a student representative on the Business School Faculty Board.