Do Australians Pay Too Much Income Tax?

Australians pay an excessive amount of revenue tax – or so some argue.

The Australian Financial Review’s economics editor, John Kehoe, for instance, has noted:

Australians are paying extra private revenue tax as a share of presidency income than another superior financial system, apart from the high-taxing Scandinavian welfare state of Denmark.

And the day after the federal election, the AFR editorialised:

Too heavy reliance on taxing productive staff and enterprise earnings blunts incentives to work, save and make investments.

Perhaps much more stinging is that the AFR considers New Zealand to have a greater income-tax system. New Zealanders pay 10.5% on their first NZ$14,000 (then 17.5% as much as NZ$48,000), whereas Australians take pleasure in a tax-free threshold up to A$18,200. The AFR says this:

creates tax-penalty work disincentives that partly clarify New Zealand’s roughly 5% larger fee of workforce participation than Australia.

Are these points actually an issue? If there’s a case for tax reform, what kind of reform?

High particular person revenue tax

In 2019 (the latest yr for which the OECD has complete statistics), Australia ranked second amongst OECD member on private revenue tax as a share of complete taxes.



In reality, it has ranked second or third in 36 of the previous 40 years, and fourth within the different 4 years, swapping locations with New Zealand and the United States.

But that’s simply a part of the image

Overall, Australia’s stage of taxation, measured as a proportion of GDP, is comparatively low – 27.7% to the OECD common of 33.4%.



That makes Australia the twenty ninth lowest-taxing nation of the OECD’s 38 members.

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Other nations have social safety taxes

The foremost purpose Australia ranks so extremely on particular person revenue tax ranges is as a result of Australians don’t pay separate social safety taxes.

Australia, New Zealand and Denmark fund social safety from normal authorities income. The different 35 OECD nations levy particular taxes on employers and workers to fund social safety techniques (unemployment assist, age and incapacity pensions and so forth)

These account for a median 25.9% of complete tax income, or near 9% of GDP, throughout the OECD.



Employee social safety contributions are very similar to income taxes. They are typically collected the identical means as revenue taxes, and counted as direct taxes on households or people in revenue surveys.

Though employers additionally pay social safety taxes, evidence suggests about two-thirds of those are successfully paid by workers by decrease wages.

In reality, if we add collectively private revenue taxes and social safety contributions, then Australia, slightly than having the second-highest share of revenue taxes within the OECD, has the eighth-lowest.



What about superannuation?

Some say Australia’s obligatory superannuation scheme, wherein employers pay 10.5% of an worker’s wage as tremendous, ought to be counted in these tax measures, as a result of it’s just like social safety contributions in different international locations.

12 different OECD international locations have obligatory employer-paid non-public pension schemes.

Employers pay this cash instantly into non-public accounts, to not the federal government, so it doesn’t meet the definition of a tax.

But for argument’s sake we are able to think about tremendous funds utilizing “tax wedge” knowledge.

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Combining obligatory funds

A tax wedge is the ratio between the quantity of taxes paid by a median employee (assumed to be single with out dependents) and the corresponding complete labour price for the employer.

The essential level right here is that wedge knowledge embrace each what employers pay as obligatory non-public funds and as obligatory funds into authorities social safety.

On this measure, Australia’s direct tax burden is the eleventh lowest within the OECD.



So claims we now have very excessive shares of non-public revenue taxes are solely a part of the image. Superannuation doesn’t change the story considerably.

So what about New Zealand?

New Zealand does accumulate extra income by consumption taxes – 12.5% of GDP in 2019, in comparison with 7.3% for Australia.



But it nonetheless collects extra in revenue taxes – 12.4% of GDP compared to 11.6%. Its complete stage of taxation is 33.4% of GDP, in comparison with 27.7% for Australia.

The case for tax reform

Even so, there are issues to be taught from New Zealand.

Australia’s system might be structured higher. As Louis XIV’s finance minister, Jean-Baptiste Colbert (1619-1683), mentioned, the artwork of taxation is about “plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.

Income taxes are extremely seen. This could make us extra able to imagine we’re extremely taxed. There is a case for contemplating tax reforms that ship ample income extra pretty.

New Zealand is within the strategy of this variation, with its proposed Social Unemployment Insurance scheme being funded by a 1.39% levy on employers and staff.

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Last month the Australian Treasury’s secretary, Steven Kennedy, mentioned in a speech it was doable for the federal government to spend extra on issues “that improve lives”, akin to higher-quality aged care and incapacity companies, “while reducing pressures arising from poorly designed policies”:

We will want a tax system match for goal to pay for these companies, that appropriately balances equity and effectivity. This is achievable.“

Given the inevitable challenges of an ageing inhabitants, local weather change and worldwide uncertainty, something that strikes the nationwide dialog on from deceptive comparisons with different nations can solely assist.


Peter Whiteford, Professor, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation beneath a Creative Commons license. Read the original article.