You might have heard this term thrown around in the media in recent months with the Stage 3 tax cuts just around the corner and The Albanese Government’s decision to revise them.

So, what is this Creep about?

The Parliamentary Budget Office explains it as a term that describes a situation where income growth causes individuals to pay higher average income tax rates each year. It is one result of a tax system which features a number of tax ‘brackets’.

Our Treasurer describes it as the reason The Government is introducing Stage 3 tax cuts which will help tackle cost of living pressures.

To understand bracket creep, we need to first talk about our marginal tax rates.

Australia has five different tax brackets, including a tax-free threshold on the first $18,200 a person earns.

The more you earn, the higher your marginal tax rate in that bracket. We all talk about how wage rise should keep up with inflation, in an ideal world, that should always be the case. But with wage rise, comes a higher marginal tax rate, because the tax system doesn’t account for inflation. And that effectively, is bracket creep.

Bracket creep actually affects lower-income people more because wage rises mean a bigger change in the amount of their income that is taxed at a higher rate. So now let’s have a look at the tax cuts and new tax brackets because as per our Government its all about easing cost of living pressures.

On face value, the middle-income earners will be the most better off under the new tax brackets. Bracket creep will, however, reduce the value of these tax cuts over time as inflation and wage growth catches up. The biggest loser, at least for the short term, might be the Federal budget as the tax cuts are expected to cost the budget more than $20 billion a year, or 1% of GDP. And then there are still one-third Australian households who don’t pay any tax at all due to low incomes, they stand to have no benefit with these tax cuts but are still struggling with inflation and cost of living pressures.