Working Australians could soon be paying more personal income tax than ever before because of rising average wages, unless the federal government can engineer alternative tax solutions.

Tax modelling data released by Treasurer Scott Morrison shows that average income tax rates are forecast to rise by around 3 per cent over the next three years as a result of bracket creep, whereby higher wages push individuals from one tax level to the next.

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As the chart below shows, Treasury is forecasting that the average tax rate will jump to almost 27 per cent from the current average rate of about 24 per cent.

The average tax rate has been progressively rising since the late 1970s, when Australians were paying an average tax rate of around 19 per cent.

Governments have progressively tackled the impact of rising wages and bracket creep by announcing income tax cuts and offsetting their revenue declines through the introduction of other tax measures. Another standard method has been to adjust the tax band themselves, so more workers can fall back into a lower tax bracket.

Testing the tax boundaries

In a joint statement released last week, Prime Minister Malcolm Turnbull and Mr Morrison said the government has been rigorously testing a range of tax reform scenarios that will reduce complexity with increasing the total tax burden as a percentage of gross domestic product.

The Treasury modelling released by the government showed one scenario in which large income tax cuts could be funded by raising the GST to 15 per cent, but Mr Turnbull has effectively ruled this out as an option.

“The modelling shows that the positive growth impact from cutting income tax would be broadly offset by the negative impact of raising GST, once an automatic increase in inflation-adjusted welfare payments is taken into account,” the statement said.

“This scenario, however, would fully compensate less than 10 per cent of households in the lowest quintile and around 20 per cent in the second quintile.”

More workers face a higher tax bill as average pay packets continue to rise. Photo: Shutterstock

The government said further measures to fully compensate low-income households would further reduce the scope for personal income tax cuts, adding to the costs to growth, and implementation risks could be considerable.

“This scenario, including the level of compensation, did not represent a preferred option by the government, but rather one that would test the potential economic benefits of a tax mix switch which maximised personal income tax cuts.”

While both the Prime Minister and Treasurer have played down the latest Treasury modelling as “indicative at best”, the looming effect of bracket creep on hundreds of thousands of working Australians is sounding alarm bells for the government as the May budget inches closer.

“However the modelling clearly shows the economic benefits that can flow as a result of Australians being unshackled from higher taxes resulting from bracket creep,” the government said.

“It shows why Labor’s ‘tax and spend’ policies would be unsustainable.”

The government said it would continue the task of strengthening the budget and explore options for reducing the income tax burden for workers.

“The government will put any final tax reform policies to the Australian people and the budget will provide a clear policy direction for Australia’s tax system.”