Taxpayers can look forward to their tax rate increasing by an average of 2.3 percentage points over the next four years, according to estimates prepared by the Parliamentary Budget Office

The PBO looked at expected changes in average personal income tax rates out to the 2021/22 tax year and reports, in a research paper published earlier this month, that for many people the tax cuts of the early 2000s will be wiped out.

Over the four years to 2021/22 more than 900,000 people (6.3 per cent of taxpayers) move from a marginal rate of 32.5 per cent to 37 per cent. Around 700,000 people (5 per cent of taxpayers) will move from a marginal tax rate of 19 per cent to 32.5 per cent.

What will drive these increase in average tax rates is expected increases in nominal incomes – bracket creep.

People whose incomes increase without crossing a tax threshold will also have a higher average tax rate because a higher proportion of their taxable income will be taxed at their marginal rate.

The average tax rate for individuals in every income quintile is projected to increase, with the largest increase to be faced by people in the third income quintile. This group, which earns between $37,000 and $56,000 of annual taxable income, is projected to face an increase of 3.2 percentage points by 2021/22. A higher proportion of their income will be taxed at their marginal rate of 32.5 per cent rate.

People in the second quintile (income from $20,000 to $37,000) face in increase of 2.5 percentage points in their average tax rate, people in the fourth quintile (income from $56,000 to $85,000) face an increase of 2.2 percentage points, and people in the fifth quintile (income of $85,000 and above) face a 1.9 percentage point increase.

People in the first income quintile (with income up to $20,000) are expected to experience very little change as most of their income will remain below the tax-free threshold.

The PBO says another factor in rising tax rates is policy change, most notably the increase in the Medicare levy from 2019/20.

By 2021/22, the average tax rate for individuals in the lowest two quintiles is expected to be below its average in 2000/01, while the average for people in the top two quintiles expected to be higher. The bracket creep that the PBO expects to see over the next four years will wipe out the effect of the big tax rate cuts between 2005/06 and 2008/09.

The current personal income tax rates are:

• zero tax on the first $18,200 of income;
• 19 per cent on the income between $18,201 and $37,000;
• $3572 plus 32.5 per cent on income between $37,001 and $87,000;
• $19,822 plus 37 per cent on income between $87,001 and $180,000;
• $54,232 plus 45 per cent on income above $180,000;
• The Temporary Budget Repair Levy was withdrawn on July1.