Bracket Creep: The Stealth Annual Tax Increase

For decades, bracket creep has been a stealth tax that the government hopes we won’t notice. It’s the tax increase that arrives unannounced whenever you get a pay rise. While you earn a little more in nominal dollars, the tax system punishes you for the privilege of keeping up with the rising cost of living. Grocery prices are up, energy prices are up, petrol prices are up, insurance and rent continue to rise, and Treasurer Jim Chalmers would like a round of applause for letting you keep slightly less of the little that is left at the end of the week.

Australia’s personal income tax system has progressive rates, which in theory means high income earners at the top end of the scale pay a higher rate of tax. However, the thresholds are not automatically indexed to inflation, which means an increasing number of Australians now find themselves in the higher brackets.

In 2008-09, Australia’s top income tax rate was adjusted to 45 per cent for every dollar you earn over $180,000. If that $180,000 threshold had been indexed to inflation, the top income tax rate of 45 per cent would now kick in at around $275,000. The reality is that in 2025-26, it kicks in at just $190,000. It’s a similar story for the lower income tax thresholds.

Treasury has described bracket creep, or “fiscal drag”, as what happens when higher tax rates apply to more income earners over time, because thresholds remain fixed while incomes rise. The Parliamentary Budget Office (PBO) has made the crucial point that bracket creep is not limited to workers who shift into a higher bracket for the first time. In fact, anyone who pays income tax and receives a pay rise can be affected, because more of their income is taxed at higher rates even if they stay within the same headline bracket. Treasury bureaucrats know it’s an issue, and to their credit the PBO has described bracket creep as a source of revenue growth “without any explicit policy change”.

That is the whole scam in one sentence – no vote, no announcement – just more tax with no accountability.

If the government wants to raise taxes, it should legislate a tax increase and defend it in public. Instead, successive federal governments have relied on a more convenient method: let inflation do the dirty work, then occasionally ‘return’ some of the proceeds in the form of tax cuts, preferably just before an election with great fanfare to ensure maximum media coverage.

It is the political equivalent of stealing your wallet, handing back the loose change, and expecting a thank-you note (or vote, as it were).

The current debate has sharpened because the Coalition is now promising to index income tax thresholds to inflation. In Angus Taylor’s 2026 budget reply speech, he proposed that a future coalition government would index the bottom two income tax thresholds from 2028-29 and the top thresholds from 2031-32.

Credit where it is due, the principle is right, although it can’t come soon enough. Tax brackets should be indexed, and government should not be rewarded for inflation. A worker whose pay rises by 4 per cent while prices rise by 4 per cent has not become 4 per cent richer. Yet under a non-indexed tax system, our government treats that worker as a more lucrative extraction opportunity. If the government causes, tolerates, or fails to contain inflation, it should not then profit from the damage.

Labor Treasurer Jim Chalmers has attacked the Coalition’s policy as irresponsible, warning that it would reduce revenue and threaten services. That is not really an argument against indexation, it is an admission that his government is addicted to increasing tax revenue. If your fiscal strategy depends on quietly taking more from hard-working Australians every year without asking them, the problem is not the indexation proposal, the problem is out of control government spending.

The temporary, discretionary income tax relief proposed in Labor’s budget is not a structural fix. It leaves the Treasurer in control of the tap and workers dependent on the mood of the bureaucracy, the electoral cycle, and whatever confected “cost of living” package fits the evening news.

The long-term numbers show why politicians like bracket creep. Recent reporting of Parliamentary Budget Office projections shows personal income tax revenue rising from 12.4 per cent of GDP to 14.5 per cent by 2036 without reform, with the average tax rate rising from 24 per cent to 28 per cent. That is a huge shift in the tax burden, achieved by inertia rather than honest tax reform . The machine simply keeps taking more.

This matters for liberty because taxation is not merely an accounting exercise. It is the transfer of power from individuals to the state. Every extra dollar taken by government is a dollar not spent, saved, invested, donated, or enjoyed by the person who earned it.

Libertarians oppose bracket creep because it offends both economic efficiency and democratic honesty. It punishes work, weakens reward for effort, and expands government by stealth.

Bracket creep hits people whose income is visible and easy to tax: wage and salary earners. Younger Australians, in particular, rely more heavily on labour income and have fewer opportunities to shelter income through assets, trusts, superannuation concessions, or capital gains arrangements. Labor’s budget has embraced inflation-adjusted treatment for capital gains by moving toward taxing real gains rather than inflationary gains, but when wages are inflated by the same economic forces, workers are apparently fair game.

The indexation of income tax rates is not a new idea; many countries already do it. In fact, Australia had tax threshold indexation during the Fraser years, before governments abandoned it in favour of discretionary adjustments. The reason is obvious: discretion benefits politicians; indexation benefits taxpayers.

Indexing tax brackets to inflation would not solve every problem in Australia’s overgrown tax system. It must be paired with spending restraint and broader tax reform. Otherwise, it risks becoming another campaign bauble rather than a genuine shift in the relationship between citizen and state. It would not automatically reduce spending, flatten the bureaucracy, or stop politicians inventing new ways to separate us from our hard-earned money. But it would help to make one important rule clear: inflation should not be a revenue strategy.

If politicians or bureaucrats want higher taxes, let them say so openly. Let them introduce the legislation, debate it, and face the voters. Until then, bracket creep remains what it has always been: a stealth increase in tax, quietly feeding the beast while workers are told to be grateful for crumbs.