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Australia is NOT a low-tax country

By Geoff Carmody - posted Thursday, 29 May 2014


In the current Budget debate, some assert Australia is a low-tax country based on statistics for OECD members. This is tendentious twaddle, relying on a comparison between 'apples and oranges'.

The assertion comes from an OECD table comparing average tax/GDP ratios for member countries that includes compulsory social security levies for European member countries, but excludes similar levies for Australia. Australia's Superannuation Guarantee (soon to be 9.5%) and our compulsory workers' compensation insurance premiums (averaging around 1.5%) are sizeable examples.

For those interested in accuracy, the OECD also produces a tax burden comparison excluding European member country social security levies. For the latest year available, this 'apples versus apples' comparison shows Australia's tax/GDP burden (26.5% in 2011) is above the OECD average (25.0% in 2011). Indeed, our average tax/GDP burden has been above the OECD average for the entire period since the election of the Whitlam Government. If Australia's more recent resort to compulsory levies (permanent and temporary) is included, we are also close to the OECD average.

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We should not be happy with this. The OECD average includes sclerotic, stagnating European members with average tax/GDP burdens ranging up to 48%. In this 'Asian Century', aren't we benchmarking ourselves against our more dynamic neighbours and trade competitors? Our non-European competitors generally have tax/GDP burdens much lower than the OECD average.

Marginal tax rates, rather than average tax rates, are generally regarded as most important for assessing tax effects on incentives to employ labour, to work, to save, etc.

Adding Australia's sizeable, growing, and proliferating suite of compulsory levies on wages and other incomes (as per the European practice) provides some worrying numbers for marginal income tax rates faced by employers, employees and others.

Chart: Marginal Tax Wedge faced by Australian Employers and Employees (% of total cost)

(a) As proposed in the 2014-15 Commonwealth Budget.
(b) Average of the 2 – 3% longevity levy proposed by Paul Keating.

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The chart shows current and proposed marginal income tax rates taking account of: the Superannuation Guarantee, workers' compensation premiums, current personal income tax rates, the Medicare Levy, the NDIS Levy, the proposed Budget deficit levy, and Paul Keating's proposed longevity levy of 2-3% (assumed to be 2.5% in the chart). I have ignored payroll tax, some other charges, and indirect taxes like the GST.

Expressed as a percentage of total direct employment costs defined as gross wages plus these taxes/levies, there is a large and growing wedge between the costs faced by employers wishing to hire people, and the disposable income left in employees' hands after these taxes and levies are extracted (and before indirect taxes on transactions).

Even for those earning less than $18,200, supposedly on a zero personal tax rate, in addition to the $100 of gross wages, employers must pay an extra $11 (about 9.9% of the combined total) for the SG and workers' compensation.

Within the highest tax bracket, every $100 paid as gross salary sees between $58 (excluding the deficit levy and Keating's longevity levy) and $62.5 extracted as personal tax or compulsory employer levies. As a percentage of employer costs including SG and workers' compensation, the marginal tax wedge is between 52.3% and 56.3% (the latter including the deficit levy and Keating's proposed longevity levy). If the SG increases further – say to 12% or even 15% - the top marginal tax wedge increases to between 54.5% and 57.2% assuming there is no deficit levy or longevity levy.

The numbers here show the formal incidence of the various taxes and levies (ie, who legally must pay). The economic incidence will depend on the state of the various markets involved, which will influence abilities to shift tax burdens around.

Nevertheless, their formal incidence is a measure of the initial impact of these taxes and levies. It is also applicable to every $100 of gross wages actually paid after any shifting of tax burdens. Most importantly, it is a warning about the distorting damage to the economy from these imposts, including via incentives to arrange one's affairs to maximize chances of shifting tax burdens to others, or at least trying to avoid them.

The high marginal tax rates shown in the table suggest strong and growing incentives legally to minimize tax burdens, especially for higher income earners. Opportunities afforded by, for example, capital gains tax discounts and superannuation concessions concentrated at the higher end of the income scale facilitate this. Increasing on-costs faced by employers probably don't help the labour market either.

Australia's revenue problem is the structure of our tax 'system', not the myth we are a low tax country.

For the deniers, the OECD and other data presented here will be regarded, at best, as an inconvenient truth.

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This article was first published in the Australian FInancial Review.



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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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