Workers who earn the minimum wage and those who are on the cusp of the top tax bracket are the hardest hit by bracket creep, according to new research.
The federal opposition wants to stamp out the longstanding feature of Australia's tax system, where people see larger proportions of their incomes taxed over time.
It occurs because tax brackets do not move with inflation, so people 'creep' into higher brackets.
Analysis by the e61 Institute and economist Richard Holden has found that workers earning about $45,000 and those earning about $190,000 are penalised the most by bracket creep, largely because their incomes are on the cusp of higher brackets.
Over a decade from 2028, someone who currently earns $45,000 would face an increase of more than five percentage points in their average tax rate. This level is close to the full-time minimum wage, although many part-timers also earn in this range.
Over the same period, someone who currently earns $190,000 would face an increase of more than four percentage points. In both of these cases, more than half of a person's real income growth would be taxed.
While those two groups are the worst affected, the vast majority of taxpayers would face a hike of at least two percentage points and see at least a quarter of their real income growth taxed.
"Taxing workers more without explicit policy change is neither an equitable nor a credible mechanism for [raising revenue]," e61 chief executive Michael Brennan said.
"The tax increase falls unevenly across the income distribution."
Budget claims of 'return to surplus' rely on bracket creep
In practice, the scenario e61 uses is unlikely to play out because it assumes there are no income tax cuts for a full decade.
As history shows, governments almost always cut taxes every few years, often close to elections, "handing back" some or all of the bracket creep.
Over several decades, these tax cuts have served to keep average tax rates broadly stable, albeit in an irregular and uneven way.
But the authors note that this same unlikely assumption is used in the government's own budget projections, helping successive treasurers to claim that the budget is on track to return to surplus, when this would not be true without bracket creep.
Analysis by the independent Parliamentary Budget Office shows the budget would have a deficit equivalent to 0.7 per cent of GDP (the size of the economy) by the end of the decade without bracket creep, contrary to the official projection of a 1 per cent surplus.
"Bracket creep should not be treated as a serious long-run funding strategy," the authors wrote. "Fiscal projections that implicitly assume it will repair the budget are not credible."
Coalition bid to index tax brackets
Opposition Leader Angus Taylor has pledged to index tax brackets to inflation if elected, phased in over two years from 2028.
The proposal would result in bracket creep being paid back to taxpayers as a lump sum at the end of each tax year, based on the level of inflation.
The opposition said the budgetary cost of the tax cuts could be met in the first three years by its proposed cuts to Labor's climate and housing policies and industry subsidies, and by scrapping Labor's $250 tax offset for wage earners.
Over the longer term, Mr Taylor has suggested the cost to the budget would be met by limiting government spending, prompting accusations from Labor that the Coalition would be forced into unspecified and damaging spending cuts to fund its plans.
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Economist Saul Eslake told the ABC that, while he supported indexing tax brackets in principle and that doing so would impose greater honesty on governments, he was doubtful governments could find the spending cuts to balance it out.
"I don't believe what the Coalition says about how much they're going to save over time. It's been evident since Josh Frydenberg's last budget that government spending was set to be higher than the average which had prevailed for decades," he said.
"That's for three reasons. The public clearly wants more aged, disability and health care … and there's a bipartisan consensus that whether the public wants it or not, they're going to get more spending on defence.
"And thirdly, as a result of deficits run up since the global financial crisis [in 2008] and because we're no longer living in the world of ultra-low interest rates, we're going to have to spend a lot more on interest.
"If you take those three areas and also add spending on pension and benefits, which I don't think anyone wants to cut, and the revenue from the GST that has to go to the states, you're talking about 67 per cent of federal spending."
Mr Eslake said governments had not been willing "to have an honest conversation with the public that if we want all this, we have to have more tax".
The e61 researchers also acknowledged the spending pressures coming from care and other areas, but said bracket creep could not be the solution to this problem.
"The two credible paths to fiscal sustainability are deliberate moderation in the growth of public spending, and tax reform to raise revenue in a more sustainable and less distortive way than bracket creep," Mr Brennan said.
