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Treasurer Joe Hockey says a key component of tax reform must be aimed at cutting personal income tax rates to end the “stealth” of bracket creep.
The treasurer will use a speech on Monday to warn of the impact on the economy if bracket creep is allowed to continue unabated.
Bracket creep occurs when people are pushed up into higher tax brackets merely as a result of wage inflation.
“If people are left in this higher tax brackets, this can lead to negative financial and economic outcomes, for individuals and the nation,” Mr Hockey will tell a conference in Sydney.
Personal income tax brackets have not been significantly adjusted since changes were announced by the Howard government in 2007, aside from an increase in the tax free threshold in 2012.
If no action is taken, in the next two years about 300,000 Australians will move into the second highest tax bracket.
The average income earner on around $77,000 pays a marginal tax rate of 32.5c in the dollar, but would rise to 37c once earning above $80,000.
Australia’s highest marginal tax rate is 47c, compared with 33c in New Zealand, 20c in Singapore and 15c in Hong Kong.
In the case of New Zealand, it is benefiting from a stronger economy, more jobs and a government that lives within its means, making it a more attractive investment destination with a low top tax rate and no payroll tax.
“Sounds like a pretty workable model, doesn’t it?” Mr Hockey will tell the Tax Institute and Chartered Accountants of Australia and New Zealand conference.
Reducing taxes will put money back in people’s pockets and encourage them to “have a go”.
Lower tax rates will also encourage budding entrepreneurs to make something of their ideas.
“It will give people the jolt they need to get better qualifications; it will provide incentive to go for that promotion – to climb the ladder of opportunity,” he will say.