Key Points:
- High-income Australians face a hidden tax penalty of up to $6,600 per year due to frozen tax brackets.
- The top tax bracket of 47% currently kicks in at $190,000 instead of an inflation-adjusted $281,450.
- Economists warn that “bracket creep” is dulling people’s incentives to accept promotions or take on extra hours.
- The average full-time worker now pays 20.3% of their income in tax, the highest level in over two decades.
Australian professionals and high-income earners are suffering a massive financial blow to their household budgets. A failure by the federal government to index income tax brackets to inflation is costing skilled workers up to $6,600 per year. This phenomenon, known as bracket creep, quietly pushes workers into higher tax brackets when they receive cost-of-living pay rises, effectively clawing back their wage gains through a stealth tax.
The current tax crisis has reignited a fierce political debate over how the government taxes hard work. Under the modified Stage 3 tax cuts introduced by the Albanese government in 2024, the threshold for the highest tax bracket was slightly raised from $180,000 to $190,000. However, this is far below the $200,000 limit originally legislated by the previous Morrison government, leaving high earners heavily exposed to inflation.
Historical data shows exactly how far behind the current tax system has fallen. If the top tax threshold had been indexed to inflation since 2008, when the Howard government last adjusted it meaningfully, it would currently sit at about $281,450. Instead, the top marginal tax rate of 45 cents in the dollar—which rises to 47 cents when including the Medicare levy—kicks in at just $190,000.
This massive gap of nearly $100,000 between where the top rate starts and where it should be acts as a heavy financial drag on the economy. Business groups and economists warn that the static tax bracket is actively destroying productivity. When workers realize that almost half of any extra dollar they earn will go straight to the tax office, they lose the incentive to take on overtime, accept promotions, or strive for performance bonuses.
The financial pain is not limited to executives and doctors. The latest Household, Income and Labor Dynamics in Australia (HILDA) survey, run by the University of Melbourne, revealed that the average full-time worker now pays 20.3% of their total income in tax. This represents a sharp increase from the 18.1% recorded in the previous year, marking the highest average tax burden Australians have faced in more than twenty years.
State political leaders have also begun pushing the federal government to enact reform. New South Wales Premier Chris Minns recently launched a public attack on federal Labor over bracket creep. Minns warned that middle-class families in his state are getting stung by high tax rates, making it even harder for them to cope with high mortgage rates and soaring grocery bills.
The opposition has proposed a permanent end to bracket creep by indexing all tax brackets to inflation, a policy already used in many other developed countries. Opposition Leader Angus Taylor argued that automatically adjusting the tax brackets to keep pace with inflation is the only fair way to prevent these hidden tax hikes. However, Treasury estimates suggest that implementing full indexation would cost the federal budget tens of billions of dollars in lost revenue every single year.
Independent members of parliament are also ramping up the pressure. Kooyong independent MP Monique Ryan has called on the government to act, arguing that working Australians are being unfairly punished by a tax system that consistently fails to adjust to economic reality. She pointed out that any nominal wage rises workers secure to survive inflation are immediately wiped out by the tax office.
The government’s decision to limit the top threshold to $190,000 appears to be a deliberate choice to bank extra revenue. By allowing bracket creep to run wild, the government quietly collects billions of dollars in additional tax revenue without having to announce a politically unpopular tax hike. Critics argue that using a stealth tax to repair the budget deficit is a dishonest way to manage national finances.
For now, the Albanese government is refusing to back down, vowing to use its parliamentary numbers to push through its wider budget agenda. But as inflation remains high and household budgets get squeezed further, the pressure on high-income and middle-income earners will only intensify. Experts warn that unless the government permanently indexes the tax system, Australia risks alienating its most skilled workers and dragging down national productivity.
