Bracket Creep and the Boston Tea Party - McCarthy Group Bracket Creep and the Boston Tea Party - McCarthy Group

A few weeks ago our founder Stephen McCarthy visited the USA to take part in an international marketing conference. While he was there, Stephen recognised some similarities between the conditions in Australia and those of the States, past and present. This is the first of four articles that he wrote while on the move around New York and Boston.

Today I am in Boston, a city renowned for its high culture and intellectual prestige. Looking around the city I have to admit, the emphasis on education is impressive. Libraries and Universities are everywhere, a testament to the exceptinoal welath of knowledge the city has amassed over decades of growth. Clearly the culture extends far back to the past, as even Mark Twain put; “In New York, they ask, ‘how much money does he have?’ In Philadelphia, they ask, ‘Why were his parents?’ In Boston, they ask, ‘How much does he know?'”

Lower Manhattan skyline at sunset

Not to put down New York or Philadelphia…

But of course Boston has much more than an excellent education system, they have a fascinating history. On December 16th, 1773 one of the most well recognised historical events occurred at the Boston harbour. the Sons of Liberty initiating a revolutionary movement of destroying a shipment of tea from the English in response to higher taxation without any representation. The famous Boston Tea Party.

This event came to mind as I was reading an article online in The Australian about the concept of Bracket Creep. As Joe Hockey was quoted as saying, ‘too many Australians are being pushed into higher tax brackets as a result of wage inflation.’

To summarise what is meant by bracket creep;

“As inflation pushes up the cost of goods and services in Australia, the incomes of Australians are also pushed up at a similar rate. The downside is that taxation is determined by set income brackets. As inflation pushes income up, some people will be moved up to a higher tax bracket, thus paying more tax.”

As many of you undoubtedly know, inflation can be a great thing for us. If we take out a mortgage of, say, $500,000 to purchase a property, that dollar amount is set. Inflation can then drive up wages, which decreases the percentage of your income going towards paying that mortgage off, leaving you more money to do with as you please.

ghg

Hooray! Time for a family holiday!

But at the same time the cost of living also rises, which means that you ultimately have less purchasing power. If you bought $100 worth of groceries in one year and then bought the same groceries for $105, then that extra $5 has come from a 5% rise in inflation. now add that amount to everything that you purchase, if you had to pay 5% on everything you buy would you think that a wage increase would match those expenses?

ghg

Dammit!

But how does this relate to the Boston Tea Party? Well when the English implemented taxation on tea to America, the extra cost (on top of a lack of representation in parliament) was enough to create a massive amount of dissent to the point that war started and ended with the American Revolution.

Now whilst there won’t be any revolution in Australia, it is interseting to note that the tax brackets haven’t changed at all since 2007. now with the average income earner up around $77,000 this could be a pretty serious issue. $80,000 and up are part of the second highest taxation bracket, if no changes is made in the next two years, almost 300,000 Australians could be affected. So instead of paying 32.5 cents in the dollar you could be paying 37.

That’s a pretty serious increase.

It will be interesting to note in the future what kind of changes are made to deal with this issue. I know that we at McCarthy Group will be monitoring the situation closely.

If you would like to have a chat with us about the investment property market, follow the link below!

Get Started!

Kind Regards,

Stephen McCarthy
CEO McCarthy Group