Australians are now paying the highest average income tax rate in over two decades, according to the latest report from the Household, Income and Labour Dynamics in Australia (HILDA) survey. This sharp rise in tax rates is not due to government hikes but rather a phenomenon called “bracket creep.” As wages rise while tax thresholds remain the same, more Australians find themselves paying a higher percentage of their income in taxes.
The Hidden Tax Impact: Bracket Creep
Bracket creep occurs when wages increase, but the tax-free thresholds aren’t adjusted for inflation. This means that, even if workers aren’t making more in real terms, they end up paying more tax because they are pushed into higher tax brackets. For instance, a worker whose income increases slightly may still find themselves paying a larger share of taxes, despite not experiencing significant improvements in their purchasing power.
It’s a subtle but impactful process. Workers might feel like they’re earning more, but because the tax system is not indexed to inflation, they end up paying a greater share of their income in taxes over time.
Who’s Feeling the Brunt?
The HILDA report reveals that workers between the ages of 35 and 54 are bearing the heaviest tax burden. These workers, typically in their prime earning years, are paying the highest percentage of their income in taxes. In contrast, older Australians—especially those over 65—pay significantly less, thanks to tax exemptions for superannuation and other retirement-related income.
For many in the 35-54 age bracket, this increasing tax burden feels particularly tough as they also face the rising costs of family life, mortgages, and retirement savings.
Tax System Adjustments and Solutions
While the government has made periodic adjustments to tax rates, these changes haven’t been enough to fully address the problem of bracket creep. The 2024-25 tax cuts did offer some relief, but without automatically adjusting tax thresholds for inflation, the trend of rising tax rates is likely to continue.
Experts suggest reducing tax concessions on non-labour income, like superannuation or capital gains, as a way to balance the tax load. Others propose exploring new revenue sources, such as land taxes or inheritance taxes, to relieve the pressure on wage earners.
The Bigger Picture
The rise in Australia’s tax rates raises important questions about fairness and sustainability. While higher taxes are necessary to fund essential services, there’s a growing concern that the current system disproportionately burdens middle-income earners, particularly those in their prime working years. As the debate continues, it’s clear that adjustments are needed to ensure the tax system is fair for everyone.
