What is bracket creep? 

Bracket creep is a term that has been coming back into vogue over recent years in relation to the tax debate that has been dominating the media and political circles of late.

Bracket creep is simply the process by which a tax system that has non-indexed income thresholds penalises taxpayers due to the nature of inflationary impacts on incomes.   

Effectively, if you have set thresholds for when a tax payer moves from one tax scale to another then the simple impact of inflation on their earnings will see them move into the higher tax bracket over time. This means they will pay more tax, through no additional earning impact on their part.

They have not received a pay rise in real terms but the tax scales penalise them by taking more in tax because the thresholds are set and not indexed like their wages are.

Governments love bracket creep because they receive higher tax revenues without having to move tax scales whilst taxpayers hate it for the obvious reason that through no real change in circumstances they are left short changed. The present government has broadened the tax thresholds but not indexed them and says this goes a long way to minimising the effect of bracket creep but taxpayers disagree. 

An equitable solution seems a long way off…

This weeks article was written by Phillip McGann - 19/01/06