The critical issue in the May 2025 election is likely to be about the rising costs of living, with competing views about whether the Labor Party is responsible for them and which of the major parties is most likely to address them.

There is a rational basis for the widespread feeling that standards of living have been eroded through costs of living rising faster than disposable, after-tax, incomes. Much of it is based on the amount of tax paid by low-paid workers whose wages have barely, if at all, kept up with inflation.

The cause of this has been bracket creep, or fiscal drag. Bracket creep occurs when a higher percentage of tax is paid on pre-tax incomes that have moved in line with inflation. Low-paid workers have suffered more from bracket creep than middle- and high-income groups. It is an arithmetical fact, and well-known to governments, that bracket creep falls most heavily on the lower paid.

This bracket creep, resulting in higher tax bites, or average taxation rates (taxes averaged across the worker’s applicable tax brackets), has been allowed and caused by successive governments.

A month after Labor was elected in May 2022, the Low and Middle Income Tax Offset was ended, with the effect that a worker on, for example, $50,000 per year had an effective tax increase of $1750 per year, or $33.54 per week. The tax cuts of 2024 at $50,000 per year were worth $929.00, or $17.80 per week, and provided only about half of the loss, which was compounded by increasing tax bites since 2022.

To understand the impact of tax on declining living standards, we need to take a longer view of changes in our income tax system.

We might, as they say, “compare the pair”. How does the tax now paid by a worker now on, for example, $50,000 per year under the Albanese Government compare to the tax paid by the worker on the same CPI-adjusted wage in 2013-14 ($37,037 per year), the last year of the second Rudd Government?

Tax bites into the wages of the low-paid have increased substantially since 2013-14. In May 2025, the Albanese Government will face an electorate, particularly in its heartland seats, that is suffering from economic pain, with after-tax incomes rising more slowly than costs of living.

Despite bracket creep falling most heavily on lower income groups, the government’s 2024 reforms prioritised tax cuts for “middle Australia”.

Further, the legislation introduced by Labor in 2024 with a 10-year horizon will compound those inequities.

These aspects are illustrated in the graph in Figure 1, which shows the increases in tax paid on incomes that have moved in line with the Consumer Price Index since 2013-14. It also shows the future impact of bracket creep with further CPI-adjusted incomes of 10%, which may occur in the term of the next Parliament.

Figure 1

Series 1: Increases in Average Tax, 2013-14 to 2024-25  Series 2: Increases in Average Tax, 2013-14 to 2024-25 plus 10% increases in income

The priority in Labor’s 2024 tax reforms, i.e. the favouring of middle-income earners over the low-paid, is shown by the Series 1 (blue) bars in Figure 1. Middle-income earners pay a lower rate of average tax than they did in 2013-14, while the low-paid pay much more. Middle-income earners got more than they had lost through bracket creep.

The Series 2 (orange) bars show the changes following a 10% increase in incomes. Even after that further increase, middle-income earners will have very little change compared to the average tax rates that they paid in 2013-14. By contrast, a worker on $50,000 per year (in 2024-25) has an average tax rate that is 49.0% higher than it was in 2013-14.

Figure 1 summarises and demonstrates these aspects: low-paid workers who have been able to gain wage increases in line with inflation have seen their after-tax incomes fall in real terms because of increasing average taxes, or tax bites.

The position is worse for lower-income part-time workers, most of whom are women. For example, a worker now on $30,000 who has been able to get wage increases in line with CPI increases has had a tax bite increase of 140.9% from 2013-14 to 2024-25, and, on a further 10% increase in gross income, the increase in the tax bite from 2013-14 will be 222.7%.

Over the past two months I have posted on Substack a series of detailed articles focusing on the impact of income tax on the disposable incomes of low-paid workers.

My proposal for a process to correct this unfairness to low-income Australians is for the progressive adjustment of the Low Income Tax Offset, which is currently at $250 per year. If Labor were inclined to do it, it may prefer to rename it as a low-income and middle-income offset and phase out payments over the income levels to about $110,000 per year (an increase from the current $66,667 per year).

The evidence demonstrates that over the past decade the low-paid have suffered in both absolute and relative terms. There is a factual basis for the widespread view that the costs of living of low-income Australians have increased faster than their after-tax incomes.

There is no sign of Labor proposing any changes to the tax system it introduced last year. Why would it, given that it sold its 2024 tax reforms, rushed through Parliament before the Dunkley by-election, as fair and appropriate?

However, the 2024 reforms explicitly prioritising “middle Australia” seemed well-suited to the electors of Dunkley, which, one could say, is located somewhere near middle Australia. Different considerations apply in a general election when Labor’s heartland electorates need to be held.

As things stand, the Albanese Government is unlikely to propose changes to the way in which the current system is loaded against low-paid workers. Notably, it has been under no pressure from the union movement to do so. The union movement has been absent from any questioning of the tax rates imposed on its traditional base, low-paid workers.

With the Coalition having stated that it does not intend to propose tax cuts, there appears to be little incentive for Labor to move on taxes.

Unless, of course, it becomes apparent that the 2024 reforms were inadequate and that the economic pain being felt in Labor’s heartland has to be addressed. Labor faces an electoral backlash in its traditional seats, where low-income workers and their families are feeling substantial economic pain.

Labor needs to hold those seats and tax cuts focusing on the low-paid could be an effective means of doing so. They could be promoted with a genuine and defensible tax equity rationale.

If Labor doesn’t take this kind of tax policy to the election others, such as Teal independents and the Greens, might do so.