The government’s tax plan to tackle “bracket creep” will only give more compensation to income earners who need it the least, a new analysis of Australia’s tax system has found.

The progressive thinktank the Australia Institute reviewed the past 18 years of tax policy and found wage earners at all levels had been overcompensated for so-called bracket creep, with income tax cut by larger amounts than the tax increased due to moving up a bracket.

Including the government’s planned flat tax of 30% for people earning between $45,000 and $200,000, the Australia Institute estimates someone earning $60,000 would be $1,919 a year better off compared with if tax thresholds had just been increased to account for inflation.

But someone on $125,000 would be $7,035 a year better off and someone on $200,000 was $19,785 better off in the same circumstances.

The thinktank’s senior economist Matt Grudnoff said that meant someone on $60,000 a year had been overcompensated by 5% of the total amount of income tax they had paid, while someone on $200,000 had benefited by 27%.

“The government’s income tax plan gives most of the tax cut benefit to the highest tax brackets,” Grudnoff said.

“These high-income individuals are already the most overcompensated. Given that bracket creep is regressive, these top tax brackets require the least compensation, not the most. Claims by the government that their top-end tax cuts are designed to reduce the impacts of bracket creep are simply not supported by the data.”

The fresh analysis comes as Labor indicates it will stand firm against the Coalition’s full $158bn tax cut package, saying the third stage to reduce the tax rate for those earning between $45,000 and $200,000 is unaffordable.

Bracket creep is when inflation alone pushes your wage into a higher tax bracket. Inflation is now at record lows, reducing the impact of bracket creep.

Stage three of the Morrison government’s $158bn tax plan, which is estimated to cost $95bn on its own, is aimed at tackling what the prime minister and his senior ministers have described as the scourge of the tax system.

“Cutting the income tax rate from 32.5c to 30c the dollar for people earning between $45,000 up to $200,000 is an important change for the future, to banish the bandit of bracket creep – which the Labor party is still wrestling with itself over – making sure that bandit can keep coming and taking from Australian’s hard-earned [money],” Morrison said on Monday.

Labor, which stood against stage three of the still-to-be legislated tax plan at the last election is facing increasing pressure to support the government’s whole plan, including the flat tax.

On Monday the opposition announced a compromise position, asking for parts of the tax plan already legislated to be brought forward and the third stage delayed, as it struggles to land on a decision.

But to allow stage three, which is due to come into effect in 2024, through the parliament would be reckless, Grudnoff said.

“The government’s changes to stage three of the tax cuts are the most fiscally reckless,” he said. “The changes to stage two, while much smaller, still represent a high income tax cut. They will give more compensation to high income earners who have already been overcompensated the most for bracket creep.

Labor says it will oppose Coalition's 'economically irresponsible' tax cuts for wealthy Read more

“Fiscal stimulus works better when money is given to low- and middle-income earners who tend to spend more of the stimulus. The government’s changes to stage 2 do not represent the best use of money for fiscal stimulus as a significant amount of the extra funds will go to high-income earners who tend to save more of the stimulus.”

Labor has changed its language on high-income earners, with both Anthony Albanese and Jim Chalmers declaring workers on $200,000 are not “the top end of town”. But both maintain it would be “economically irresponsible” to pass tax cuts for the highest income earners in the current economic climate.

At a speech at the National Press Club on Tuesday, the shadow treasuer will urge the Coalition to do more to stimulate activity, saying the government must be held accountable for the “floundering” economy.

“The economy’s floundering, middle Australia is struggling and the Reserve Bank is hurtling towards the end of the monetary policy runway, with coherent fiscal policy from the Liberals nowhere in sight,” Chalmers will say. “There couldn’t be a worse time for a government which has no idea how to turn things around.”

Amid the economic downturn, the interest rates are are heading for unprecedented lows below 1% and the Reserve Bank could even be forced into extraordinary measures such as money printing to stimulate the struggling economy, forecasters believe.

Chalmers will also take aim at the treasurer, Josh Frydenberg, saying he is “frustrated” to see the government attribute the economic slowdown to international trade tensions rather than domestic conditions.

“The treasurer’s comments from overseas, solely attributing Australia’s economic woes to international conditions, ignoring the warning signs in our domestic economy, were disappointing but not especially surprising,” he says. “The treasurer was too busy ringing the bell on Wall Street to hear the warning bells at home.”