MILLIONS of Australian workers face a tax trap that will reap an extra $25 billion over the next four years.
New research has confirmed the devastating impact of bracket creep, which forces people to higher tax levels as a result of rising wages and inflation and hits low income earners the hardest.
Unless the Abbott Government embarks on tax reform, average workers earning $78,000-a-year will be forced into the second-highest tax bracket next year. Any income over $80,000 will be slugged at 37 cents in the dollar.
The Sunday Mail commissioned research by the National Centre for Social and Economic Modelling which confirms that 1.8 million Australians will be hit over the next four years.
Prime Minister Tony Abbott concedes that average workers will pay the equivalent of $3800 more tax every year as a result of bracket creep over time.
Without tax relief, the average income tax rate for average earners will rise from 23 per cent to 28 per cent over the next decade.
Treasurer Joe Hockey said the NATSEM research confirmed the need for tax reform to restore fairness to the tax system.
"The principle of bracket creep is that it hurts people on lowest incomes. We are the party of lower taxes," he said. "But we need to get the Budget under control and the Labor Party is holding up $28 billion in savings. That is why it is time to have a Tax White Paper to inform the Government."
Mr Hockey is expected to announce the terms of reference for the Government's tax inequity study shortly.
NATSEM's Ben Phillips said the figures confirmed that bracket creep was a far bigger tax hit to families than the petrol tax increases or other Budget nasties. While the fuel excise increase will raise $2 billion, bracket creep will take $25 billion from people's pockets over the same period.
"It's really the stealth tax increases, the bracket creep, that brings in the bigger dollars in the long term," Mr Phillips said. "To be fair those tax brackets should be increased with inflation. Because it's not increased to inflation, people naturally move up to higher income tax thresholds."
Bracket creep will gouge an extra $2.4 billion in income taxes from workers this year alone, according to NATSEM. Without formally increasing taxes, the Treasurer will gouge workers by an extra $5 billion a year in 2015 purely as a result of bracket creep.
NATSEM research assumes a conservative 2.75 per cent a year wages growth this year and 3 per cent beyond, as is assumed in the Budget. If wages rise faster than forecast the impact of bracket creep would be even greater.