Business: Higher taxes to hit 1.6 million Australians, Parliamentary Budget Office report reveals

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Higher taxes to hit 1.6 million Australians, Parliamentary Budget Office report reveals

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More than one million Australians will be hit with increased taxes over the next five years as the rising wages of middle income earners force them into higher tax brackets.

The assessment from the Parliamentary Budget Office, released on Wednesday, could set the stage for pre-election personal tax cuts as early as next year.

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The Budget Office found the average tax rate will climb 2.3 per cent over the next five years and affect at least 1.6 million Australians.

"The largest increase is expected to be faced by individuals in the middle income quintile, whose taxable income is expected to average $46,000 in 2017-2018," the Budget Office said.

"Their average tax rate is expected to increase from 14.9 per cent to 18.2 per cent."

The 20-year-high is equivalent to an extra $2000 tax per year for someone on that income.

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Without government intervention, the levels that people are taxed at remains fixed even as incomes grow with inflation.

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As a result, peopl e are pushed into higher tax brackets without necessarily earning more money in real terms.

Treasurer Scott Morrison undertook the first significant change to tax brackets since 2007 when he increased the middle tax bracket threshold from $80,000 to $87,000 from July 2016.

The changes saved about 500,000 Australians from shifting into the next tax bracket at the time, but the Budget Office is now predicting that by 2021 up to 900,000 people will move into that tax threshold, where they pay 37¢ in tax on the dollar.

The government has in the past relied on this extra revenue to get it on the path back to surplus and as a result meaningful tax relief for other income groups has not occurred for the past decade.

"The government will consider further measures to reduce the burden of tax as fiscal settings allow," Mr Morrison said last year, describing bracket creep as the "silent tax" that discouraged people from working more and hinting further adjustments could be on the cards.

The Budget Office said in addition to bracket creep, average tax rates are projected to increase due to policy changes - most notably the decision to increase the Medicare Levy from 2019-20 - that will particularly hit people in the third, fourth and fifth highest tax brackets.

It added that demographic changes would also reduce the overall net tax rate by 2021, as net migration increases the proportion of younger workers and an ageing population increases the number of seniors.

Shadow treasurer Chris Bowen said middle income earners would wear the greatest tax burden under the Coalition.

"At a time when wages are growing at record lows and households are facing a cost of living crunch due to record levels of debt and rising energy costs, now is not the time to be hitting middle Australia with increases in personal income tax rates," he said.

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