IMF: Australia world number one in tax rent-seeking

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By Leith van Onselen

A new report from the International Monetary Fund (IMF) suggests that Australia has the highest tax expenditures in the OECD when measured against GDP (see next chart).

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According to the report, tax expenditures are:

…government revenues foregone as a result of differential, or preferential, treatment of specific sectors, activities, regions, or agents. They can take many forms, including allowances (deductions from the base), exemptions (exclusions from the base), rate relief (lower rates), credits (reductions in liability) and tax deferrals (postponing payments).

The IMF believes that tax expenditures should be reformed since they:

…can have major consequences for the fairness, complexity, efficiency, and effectiveness of not only the tax system itself but, since they often serve purposes that might be (or are also) pursued through public spending, of the wider fiscal system.

It also argues that now is the time to roll back tax expenditures to help cut budget deficits. Regular reviews would increase scrutiny of outdated perks, and many could be replaced with more targeted measures, since most of the benefits are currently enjoyed by the wealthy rather than those needing help.

In Australia’s case, obvious tax expenditures that should be wound-back include negative gearing and superannuation concessions, whose benefits overwhelmingly flow to higher income earners and undermines the progressiveness of the tax system.

That said, reform is obviously easier said than done, as evident by the ruckus created when the former Labor Government last year attempted to reform fringe benefits on company vehicles.

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Unconventional Economist
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  1. However, this does not consider the fact that Australia has punitive margin tax rates on personal income and the relatively low level at which those tax rates take effect. If less deductions are introduced with lower tax rates, fair enough. But that isn’t going to happen.

    • I was under the impression that Australia has some of the lowest rates of tax in the world, atleast the developed world. Perhaps you can correct this as it has been mentioned multiple times on MB?

      • Tax expenditures are a measure of inefficiency within the tax system, not the size of the rates themselves. It’s about how the tax is collected and where it is collected from.

    • Good grief, does it not cause you the slightest bit of embarrassment to publish such blatantly uninformed nonsense in public?

      Obviously not, stupid is as stupid does I suppose.

      • Australia has a very low total tax take against GDP of developed countries, particularly if very small (land area) countries and oil majors are excluded. The US similarly has a very low tax take to GDP for a highly developed country.

        It is abundantly clear who has been winning the class war for the last probably 20 years (since eg the introduction of franking credits).

        Stats on wealth and income shares have been linked to or summarised here in the past.

      • Absolutely Explorer – the absolute gump some people swallow, geoffw probably sourced most of his ‘facts’ from Alan Jones.

      • Discostu,

        We’ve got a culture of middle class welfare paid for by high taxation most notably on income, killing the motive to contribute through income generation and productive enterprise. If you look at the list of maximum marginal tax rates in this list, you can see the counries with higher maximum rates than ours are generally the ones with even bigger welfare states.
        A general comparison to OECD counries isn’t the answer – they’ve got the same problem.
        NB This is not a statement about welfare for the needy – no question about that.

        Agree with comments that the big sharks are getting away with murder.

        What have franking credits got to do with a class war? It just removes the double taxation that applied before their introduction.

      • Yeah, I see that America, well known for it’s bloated welfare system (not) has an even higher personal tax rate than Australia:

        55.9% (max of federal+state+local) 10%-39.6% (federal)[140] +
        0%-13.3% (state)[141] +
        0%-3% (local)

        Where as those well known countries that we would all like to live in (again not) like Angola, Morocco, Argentina are all considerably lower.

        No argument that a lot of middle class welfare should be trimmed, but by all measures, Australia has one of the most efficient welfare systems out there.

        FYI – our top tax rate, at 45c in the dollar doesn’t kick in until you earn more than $180k per year, which is $57k, so you have to earn close to 4 times median income before you hit that top tax rate…. but it still kicks in too low for you?

      • I see on that Business Insider list that the US is actually between the 50th and 60th on the overall level of taxation for incomes of 100K and 300K. Americans have an incentive to work hard and they don’t have as much of an entitlement culture as Australia. Not surpriing that they have a vibrant entrepreneurial outlook and dominating technology innovation.
        I don’t think there is a “right” level of welfare, but i’d be the first to agree that the US is not a great place to be poor.

  2. Labor’s effectiveness at selling its major reforms including minnig tax was quite poor and in any event Obeid, Thompson, Williams(?) HSU, and multiple knifings of PM’s coupled with the relentless attacks of the Murdoch press was going to cost them the election anyway.

  3. Tax ‘expenditures’ ?

    We live in an Orwellian world where even language can be bastardised.

    If the government lets us keep 51% or even 10% of what we produce, that is considered an ‘expenditure’ now.

    Utter moral depravity.
    Slavery is back in fashion.

    • The world is so complex it is very hard to tell exactly how much each person has “produced”.

      For example what % of Australia’s win in the cricket was produced by Michael Clark?

      How many dollars should he get?

      What was his contribution to society last year?

      He learnt to play on a free public cricket pitch. Is this unjust? Does a free-market have public cricket pitches?

  4. Agree with your conclusion re superannuation. Negative gearing, though is not a TE against any sensible benchmark. For Australia’s published TEs, the benchmark includes deductibility of interest expenses and full inclusion of capital gains on realisation. The relevant TE is the CGT discount. Arguably the deferred taxation of gains (on realisation) should also be a TE.

    That said the benchmarks for Australia’s TEs are somewhat ad hoc. For example from 2012 the benchmark for natural resource taxation has included a 30 per cent rent tax on iron ore and coal. The new TE statement exludes this from the benchmark to reflect the planned abolition of the MRRT.

  5. Tax expenditures on this scale are an out and out loss, including for those who exploit the flaws in the tax system.

    We have one of the smallest governments by OECD rich club standards, beaten in this race to the bottom only by the USA and South Korea. (The US government spend excludes much of their health care so add that back or deduct Medicare for a fair comparison)

    Combine the ~8% of GDP squandered here and the ~5% of GDP in deadweight losses from our very bad tax bases and it is clear tax reform looms as the single most useful thing government can do to improve Australian living standards.

    Many dismiss tax reform as ‘too hard’. With an economic prize this large, our elected representatives should be pursuing change with their ears pinned back.

    Rudd and Gillard failed the Australian people on introducing the RSPT, cowed by resource rent-seekers. We replaced them with a bunch of clowns who think macro is micro written in big letters.

    National prosperity ought to be our objective. But no, that doesn’t seem to be on anyone’s agenda.

    • We replaced them with a bunch of clowns who think macro is micro written in big letters.

      Priceless ….

    • ” We replaced them with a bunch of clowns who think macro is micro written in big letters.”

      So good, I had to post it again

    • The RSPT was ill conceived, poorly drafted and represented risk to both the resource and public sectors.

      It is now widely acknowledged that the RSPT met appropriate fate and as we know has been replaced by the more sensible MRRT.

      To focus on this former tax as a panacea to our woes is misguided.

      • Earning your salary again, 2D? Your stance is garbage. I have to pay higher taxes than otherwise because of Labor’s failure. Every non-mining citizen in Australia should be furious about this.

      • Seriously David. Your dissatisfaction can as easily be applied to perceived inadequacies surrounding tax treatments affecting negative gearing, superannuation, the absence of a broad based land tax, narrowed GST application, et al.

      • I am most dissatisfied with our failing tax system, 2D. It nets every minnow and allows sharks to swim free.

        The GST is also a bad tax. It is regressive. It takes more from the poor who must consume all their income than the better off. IMHO, it is merely a resurrection of Britain’s Corn Laws.

        You might be content to tolerate both tax expenditures and deadweight losses, but I am not. We can do better than this.

    • SchillersMEMBER

      +1 David.

      What’s also often missed is the size of Government, relative to the size of the economy. As you point out, at 33.2% of GDP, Australia (Fed and state) have one of the smallest Government sectors in the developed world.
      Total Government revenues as well as spending are smaller than in any other English speaking democracy.
      What’s interesting is current Commonwealth revenue is lower (as a % of GDP) than in every year of the Howard/Costello government. Spending has hardly increased at all, from 25.1% of GDP in Costello’s first budget to 25.3% this year.

      As stated elsewhere on this site what we have is a crisis in Government revenues, not outlays. We have a structural deficit caused mainly by big falls in revenue over the last 6 years, mainly due to big income tax cuts from 2003-2008. Only a small portion of which is now being clawed back through bracket creep.

  6. I’d like to see bar charts with Debt to GDP and / or GDP per capita. Or even Tax Revenue per capita.

    Does the Laffer curve apply here?

    On the face of it, Australia looks terrible given we sell natural resources and still feel the need to have such large Tax “Expenditures”.

    Agreed – “TE” a horrible term.

  7. ceteris paribus

    Tax expenditures are an elusive target, mainly because they are complex and hidden. Let’s ban them altogether and make everyone line up at Centrelink to formally submit grant applications where they wish to claim “special consideration”. Ho!