How highly taxed are we?

From any point of view other than a Eurocentric one, Australia is not a low-taxing country. We should call a spade a spade. With a level of taxation that is 31.5 per cent of GDP, we are high taxing. We are fractionally more highly taxing than the OECD on a weighted average basis and we are well and truly more highly taxing than the seven OECD countries with a Pacific coast.

A close look at the OECD revenue statistics also reveals that Australia has a comparatively high reliance on income taxation. This is true of both the personal and corporate income tax bases. Our use of these tax bases combined (as a proportion of GDP) is more than 50 per cent higher than the weighted average for all of the OECD.

According to the latest OECD data, Australia’s taxation of corporate income (as a proportion of GDP) is the third highest of all OECD members and is more than double the weighted average of these countries.

Australia’s very heavy reliance on income taxation is a threat to Australia’s international competitiveness. This is particularly true in the context of an increasingly global operating environment for business and the ever-expanding opportunities for the employment offshore of highly sought after Australian talent.

Our high use of the income tax base has a number of flow-on effects that further dent our competitive performance. Heavy income taxation requires high marginal rates of income tax. These distort individual decisions relating to workforce participation, saving and investment. They also compound incentives to under-report income and otherwise reduce tax liabilities. These incentives, in turn, incite the taxation authorities to write further complexity into the tax law and add to the growing compliance burden on business and on individuals.

The OECD tax data provide compelling support for those calling for a continuation of the reform of Australian taxation. However, they certainly do not support claims such as Michael Keating’s that Australia could “tolerate a significant increase in the ratio of taxation to GDP without great difficulty”.

On the contrary, a leading risk of a significant rise in the overall level of domestic taxation is an adverse shift in Australia’s competitiveness relative to other developed countries and, most critically, relative to our largest and closest trading partners.