Bracket creep: how inflation silently raises your tax rate every year

What is bracket creep?

Australia's income tax system uses fixed dollar thresholds to determine how much tax you pay. Earn under $18,200 and you pay nothing. Earn between $18,201 and $45,000 and you pay 19 cents per dollar above the threshold. And so on, up to the top marginal rate of 45% for income above $180,000.

The problem? Those thresholds don't automatically rise with inflation or wage growth. So when your pay goes up by 3–4% to keep pace with the cost of living, you don't just pay more tax - you often pay tax at a higher marginal rate on a larger share of your income. Your purchasing power hasn't actually improved, but the government's take has.

This is bracket creep, and it's been quietly draining Australian workers for decades.

The numbers are real and they're significant

Consider a worker earning $45,000 in 2010. Adjusted for inflation, that's equivalent to roughly $62,000 in 2024 dollars. But the 19% tax bracket's upper threshold is still only $45,000 - meaning that same worker, now earning $62,000 just to maintain their standard of living, is paying the 32.5% marginal rate on a substantial portion of their income.

The Australian Treasury has acknowledged that bracket creep represents a structural windfall for the federal government. The Parliamentary Budget Office estimated in 2023 that without any threshold changes, bracket creep would deliver the government an extra $25 billion per year in additional revenue by the mid-2020s - money taken from workers' pay packets without a single parliamentary vote on a tax increase.

By 2030, the Australian Institute of Fiscal Studies projects that a worker on average full-time earnings (currently around $98,000) could face an effective marginal tax rate approaching 40% as wages grow - a rate once reserved for high-income earners.

Who does it hurt the most?

Bracket creep isn't felt equally. The biggest losers are:

• Low-to-middle income workers on $45,000–$90,000, who cross into the 32.5% bracket with modest wage growth
• Workers in industries with award increases, whose legally mandated pay rises translate directly into higher tax bills
• Young Australians entering the workforce in an era of high inflation, who see real-terms pay rises eaten by both prices and taxes simultaneously
• Part-time workers and women returning to the workforce, who are most sensitive to changes near threshold boundaries

High-income earners above $180,000 already pay the top rate - they can't be pushed higher. Bracket creep is fundamentally a middle Australia problem.

Why do governments let it happen?

Here's the uncomfortable truth: bracket creep is politically useful. It allows governments to collect more tax revenue without ever announcing a tax increase. There's no budget night announcement, no press conference, no bill through parliament. It just happens, quietly, every year.

Both the Coalition and Labor governments have known about this for decades. Occasionally, they'll stage a tax cut - the Stage 3 tax cuts being a recent example - and claim credit for giving money back to workers. But what they're often doing is returning a portion of the bracket creep windfall they've already collected, while keeping the rest.

It's a remarkable political trick: take money invisibly, return some of it visibly, and call yourself a tax-cutting government.

The Stage 3 tax cuts, modified by the Albanese government in early 2024, did deliver some relief - particularly to lower and middle income earners after the redesign. But they were legislated as a one-time fix, not a permanent indexation mechanism. Within a few years, bracket creep will have eroded those gains too.

The obvious fix no one will implement

Most comparable countries - including Canada, the United States, and New Zealand - automatically index their tax brackets to inflation each year. It's not complicated. It just means the thresholds rise in line with the Consumer Price Index, so a cost-of-living wage rise doesn't trigger a higher tax rate.

In Australia, this reform has been proposed repeatedly by economists, the Grattan Institute, the Tax Foundation, and independent crossbenchers. It consistently polls well with the public. And it consistently goes nowhere.

Why? Because automatic indexation would cost the government approximately $5–8 billion per year in foregone revenue - money that both major parties quietly rely on to fund spending without having to make hard choices about the budget.

Why this is exactly what direct democracy is for

This is a policy that:

• Most Australians would vote to fix if asked directly
• Both major parties refuse to fix because it benefits them financially
• Persists not because of public support, but because of the gap between what voters want and what politicians do

Bracket creep is a textbook example of a policy that survives because ordinary people have no direct mechanism to stop it. You can vote Labor or Liberal at the next election - but both parties have presided over bracket creep for generations. The policy isn't a mistake or an oversight. It's a choice, made on your behalf, that you were never asked about.

At Direct Democracy, our members would vote on exactly this kind of issue - and elected representatives would be bound to act on the result. No more silent tax increases by inertia. No more waiting for a government to generously return what it quietly took.

If Australians were asked directly whether their tax brackets should keep pace with inflation, we think we know what they'd say.

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