Myth busted: Australia’s income tax is below average

The ANU’s Peter Whiteford has debunked the view that Australia is a high taxing nation, nor that its personal income taxes are among the highest in the world.

According to Whiteford, Australia is the OECD’s 10th lowest taxing nation:

Tax revenue as a percentage of GDP

Whiteford also argues that Australia’s personal income tax take is distorted, since it does not include compulsory social security taxes, which are effectively raised like income taxes in other nations and “are very similar to income taxes”:

Social security taxes

So, while superficially Australia has the second largest personal income tax take in the OECD:

Reliance on income taxes

Once you factor in social security taxes, Australia’s personal income tax take is actually below the OECD average:

Adjusted reliance on income taxes

Even if you factor in Australia’s compulsory superannuation contributions, which are “similar to social security contributions in other countries”, Australia’s personal income tax take is below the OECD average:

Reliance on income taxes including superannuation

I personally wouldn’t care if Australia’s tax take was higher than the OECD average. Tax revenue is required to fund the public services that the community both expects and needs. And I wouldn’t care if taxes were increased if it meant important social programs remained (or were expanded), along with the provision of well-targeted infrastructure and services.

Of primary importance is ensuring that the tax base is broadened and based on efficient and equitable sources. And this is where Australia’s tax system is failing.

The below chart from the Australian Treasury is a bit dated but shows how Australia in 2014-15 was just as reliant on income and profits taxes as it was in the 1950s, and will become more so over the coming years as bracket creep (aka “fiscal drag”) increases workers’ tax burdens:

Australia's tax structure

Of course, wages growth has been lower than initially projected, so any bracket creep would be slower than anticipated above. But the central point still remains.

What Australia really needs is a comprehensive tax reform package that broadens the base and shifts the tax burden away from productive effort. We need to stop working Australians being over-taxed on their labour income while the wealthy older generations pay minimal taxes.

A broad-based package should include a combination of income tax cuts, measures to improve the interplay between the tax and welfare systems, broad-based land taxes and inheritance taxes, consumption taxes, unwinding inefficient and inequitable tax concessions, rationalisation of state and federal taxes, further measures to prevent multinational tax avoidance, and even company tax cuts.

The important thing is that the package is comprehensive so that the overall tax base is broadened and built around more efficient and equitable sources.

Doing nothing and relying on never-ending increases in personal income tax via bracket creep, while the base of workers shrinks as the population ages and the proportion of retirees rises, is neither efficient, equitable or sustainable in the long-term. It would ultimately lower Australian living standards, especially for the younger generations, whose tax burden rises inexorably.

Sadly, while the logic behind genuine tax reform is sound, the politics is messy, which is why both sides of politics always baulk at the idea.

Unconventional Economist
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