Next month's tax cuts won't make much difference to bracket creep

But the way our politicians carry on, you'd be forgiven for thinking there's a downside because of "bracket creep", or paying a higher share of income in tax.

Indeed, this is one of those issues where both major parties can put aside their differences. Whoever wins July's election, from next month there will be small changes made to tax thresholds designed to (slightly) counter bracket creep.

On closer inspection, however, both Labor and the Coalition's moves to rein in bracket creep won't make much difference at all where it arguably matters most: encouraging more people to be in the labour force.

Bracket creep describes a mathematical fact of our progressive system of tax. As your taxable income rises, so will the average rate of tax you pay.

This matters in the long term because tax rates can affect the incentive to work. But let's not overstate it. For someone working full time, the change in incentives can be tiny indeed.

For example, let's look at how much extra tax you'd pay if your top marginal rate moved from the 32.5 per cent to the 37 per cent tax bracket.

From July 1, such a change would occur if a worker on $87,000 gets a pay rise to $90,000.

It is only the extra $3000 over the bracket that is taxed at the higher rate. Moreover, the increase in the top marginal rate is pretty small, only rising by 4.5c.

Helen Hodgson, an associate professor in tax at Curtin University, says people often overestimate the impact of a change like this.

"For the vast majority of people, that is not going to be a huge impost compared with the amount that you get to take home," she says of moving up one rung from the 32.5c bracket.

Moving into a higher top tax bracket can have a bigger impact, however, for people on lower incomes who are also receiving benefits that are means-tested.

For these workers, moving up a tax bracket can have a double-whammy impact of raising your marginal tax rate, while also lowering the benefits you receive.

Hodgson points out some benefits are reduced by 50c in the dollar for every extra dollar you earn above a certain level.

People in this situation could be much more likely to change their behaviour because of tax than those earning $87,000 who get a pay rise.

"If you pay tax, but you also lose half your benefit, that puts you at a much higher risk of changing your decisions about how to work," Hodgson says.

But the budget's changes to the tax brackets won't make any difference to these workers, or their decisions about entering the workforce.

If governments really wanted to counter the effects of bracket creep, there's something pretty obvious they could do. Why not link the tax scales to either inflation or average incomes so that the brackets automatically increased every year? This is what they do in a handful of countries including the United States, Canada and Netherlands.

Guess what? It's been tried here too, but was ditched soon after.

Malcolm Fraser's government indexed the tax scales to inflation in 1976. But within years the change was watered down and ultimately scrapped, after it made life harder in reducing the deficit.

For all the fuss about bracket creep, it's easy to see why pollies also rely on it as a less visible source of collecting more tax. The changes coming into effect next month won't make much of a difference to this situation.