It’s called bracket creep, or fiscal drag.
Wages crawl up each year as employers give – lately very small – rises to keep pace with inflation. But eventually these increases mount up and taxpayers find themselves moved into the next highest tax bracket.
Treasury Secretary Martin Parkinson, in a speech today, outlined the process.
He explained someone on average full-time earnings would be dragged from the 32.5% tax bracket into the 37% level from 2015-16, next financial year. This tax bracket is applied when annual earnings reach $80,001.
And this will increase the average tax rate faced by a taxpayer earning the projected average from 23% to 28% by 2024-25 – an increase in their tax burden of almost a quarter. “If fiscal drag is not periodically returned in the form of personal income tax cuts,” Parkinson said, “it can reduce incentives for work force participation at low levels of income, and increase incentives for tax minimisation at higher levels of income.”
Here’s the chart that explains it: