Concerns that future government revenue will be reliant on Australians being forced into higher tax brackets has led to calls for the Abbott Government to address the issue.

In his budget reply speech, Opposition Leader Bill Shorten criticised Treasurer Joe Hockey for not mentioning this issue, commonly referred to as bracket creep, when he presented the budget to Parliament.

Mr Shorten said bracket creep was "the invisible hand in the pocket of every Australian worker", and said Tony Abbott and Joe Hockey were "getting inflation to do their dirty work".

"Bracket creep is the biggest driver of revenue in [Mr Hockey's] budget," Mr Shorten said.

What is bracket creep? ABC Fact Check takes a look.

What is bracket creep?

Australia has a progressive taxation system, which means that as people earn more, the proportion of tax they pay on their overall income goes up.

For example, people who earn $50,000 will pay only 17.6 per cent of their income in tax, compared with people who earn $300,000 who pay around 39 per cent tax.

The first $18,200 that people earn is tax free and then income is taxed at progressively higher rates for each dollar earned over the five thresholds, termed tax 'brackets'.

ATO 2014-15 tax rates and thresholds Taxable income Tax on this income $0-$18,200 Nil $18,201-$37,000 19 cents for each $1 over $18,200 $37,001-$80,000 $3,572 plus 32.5 cents for each $1 over $37,000 $80,001-$180,000 $17,547 plus 37 cents for each $1 over $80,000 $180,001 and over $54,547 plus 45 cents for each $1 over $180,000 Note: Doesn't include Medicare levy or temporary budget repair levy

The Government's tax discussion paper defines bracket creep as referring "to the fact that taxpayers will face higher average, and sometimes marginal, tax rates over time even if their income has only increased by inflation".

Using the example of the person earning $50,000, their average tax rate is 17.6 per cent and their marginal tax rate is 32.5 per cent, the highest rate applied to their income, and then to only some of that income.

What this means is that if the tax thresholds don't change, inflation will increase people's wages over time and eventually carry more and more taxpayers into higher brackets, which makes their marginal rate of tax go up.

But bracket creep can also increase their average tax rate even if they don't move into the next bracket because as their income increases, the proportion of tax they are paying will also increase.

The tax discussion paper notes that between 2014-15 and 2024-25, the percentage of taxpayers in the top two brackets will increase from around 27 per cent to 43 per cent and over two million more taxpayers will be in the $80,001 to $180,000 tax bracket.

Bracket creep and wage growth

The tax thresholds are not indexed, which means they do not automatically keep pace with price inflation or wage growth.

Wages are only expected to grow between 2.5 per cent and 2.75 per cent over the next four years and the budget papers noted lower wage growth had also led to lower tax collections.

Bracket creep can be "handed back" to income earners by cutting tax rates and governments need to periodically give further tax cuts to maintain the reward for effort, according to the tax discussion paper.

It states that employment and wage growth tends to be relatively steady with individuals income tax providing a stable revenue source.

"Governments over recent decades have generally lowered rates or raised thresholds to deliver tax cuts from time to time, keeping the proportion of revenue raised from individuals income tax relatively stable," it said.

Low and middle income earners disproportionately affected

The average tax rate income earners pay depends on how much of their income fits into each tax bracket.

Someone on average earnings of $75,000 in 2013-14 had an average tax rate of 22.7 per cent, made up of their first $18,200 not being taxed, the 19 cents they are paying for every dollar they earn between $18,201 and $37,000 and the 32.5 cents on every dollar they earn between $37,001 and $80,000.

Treasury calculates that average full time earnings will rise to $104,000 in 2023-24 and that these average taxpayers will be paying 27.4 per cent tax.

However, bracket creep causes the tax rate to increase by a much greater percentage for low income earners compared with those who earn more.

Treasury uses the example of someone on a low income earning $37,500 in 2013-14 and compares them with an average income of $75,000 and a high income of $150,000.

The table below shows that by 2023-24, each taxpayer earns more money and pays a higher average rate of tax.

Bracket creep from 2013-14 to 2023-24 Low income Tax rate (per cent) Average income Tax rate High income Tax rate 2013-14 income $37,500 10.3 $75,000 22.7 $150,000 30.5 2023-24 income $52,000 17.8 $104,000 27.4 $208,000 34.3 Change in tax rate (percentage points) 7.5 4.7 3.8 Source: Treasury, Re:think tax discussion paper

Chris Richardson, a director of Deloitte Access Economics, told Fact Check bracket creep was taxation by stealth.

"It's an unfair and ungainly way to raise taxes that puts additional pressure on taxpayers and the Australian economy over time," he said.

Tax cuts returned bracket creep, and then some

If keeping the tax rates steady as inflation pushes people into higher brackets, cutting the tax rates can eliminate bracket creep, and keep the proportion of tax revenue from income tax steady.

Treasury data shows that a series of tax cuts between 2003 and 2011 reduced the average rate of personal income tax from 24.3 per cent in 2003-04 to 21.2 per cent in 2010-11.

These tax cuts, implemented by raising the tax brackets, took the top tax bracket from $62,501 in 2003-04, to $70,000 in 2004-05, to $95,000 in 2005-06, to $150,001 in 2007-08 and finally to $180,001 in 2009-10, where it remains.

Treasury noted the tax cuts through the late 2000s were significantly more than was required to "return" the effects of earlier bracket creep back to individual taxpayers.

The data shows that personal income tax as a proportion of GDP fell from 2004 to 2010 but has been steadily increasing ever since, which Treasury attributes to bracket creep, driven by wage inflation as individuals move to higher average tax rates.

This graph shows the average rate of income tax as a percentage of GDP. ( ABC Fact Check/Treasury )

Ben Phillips, principal research fellow at the National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra, told Fact Check the benefits of past tax cuts were often forgotten in the bracket creep debate.

He said tax cuts under Howard and then Rudd had cancelled out the effects of bracket creep.

"So we suspect the last few years there's obviously been bracket creep but if you go back historically, we're actually better off, that is, individuals are paying a lower average rate of tax," he said.

Mr Phillips said the progressive tax system assumed that people with higher incomes and a higher standard of living paid more tax in the dollar. "But I don't think anyone can seriously say what the ideal tax rate is," he said.

How much revenue comes from bracket creep?

Treasury secretary John Fraser said in an interview at the Grattan Institute on May 15 that bracket creep would account for $5.5 billion in Government revenue for 2015-16, with around $25 billion coming from bracket creep over the four years of forward estimates.

Fact Check asked Mr Phillips to calculate the value of bracket creep.

He estimated that bracket creep was worth $26.5 billion over forward estimates, almost the same as quoted by Mr Fraser.

The NATSEM modelling used its Static Incomes Model of the Australian Tax and Benefit system, which assumed an inflation rate (CPI) of 2.5 per cent, 3 per cent wage growth and used the Australian Bureau of Statistics latest population projections.

In an address to the Tax Institute in March 2015, Mr Hockey said that if the Government didn't give back "these ratcheting tax collections through tax breaks" they would constrain growth.

"Obviously, the faster we can get to the point where as a nation we live within our means – and reach our target of a budget surplus – the more capacity we've got to incentivise people through tax cuts," he said.