To tax, or not to tax – that is the question?

11 Jun 2019

Martin Heffron

Executive Director

As the dust settles on the election and everyone steels themselves for the 46th Parliament to commence, it gives us some space and time to reflect on some of the important issues that were thrown around in the heat of the election campaign but not really debated.

For example, is Australia a high taxing country or not?

As with most complex subjects, there are a few ways of looking at this. If we are to take the simple view and look at the proportion of GDP governments take in tax revenue compared to similar countries, we are a modestly taxed country at best.

Consider the following table (the red line is Australia, the blue line is the rest of the OECD):

On the basis of this simple measure, any objective commentary would have to conclude that the tax burden on the community is relatively low - Australia (red line) is quite a bit below the blue line (rest of the OECD).

That being the case, why is it that so many Australians feel so highly taxed? Are we a selfish bunch with no community spirit or is there something more to it?

Consider this table (again, the red line is Australia and the blue line is everyone else):

There is an extraordinary dichotomy here.

As a nation we are modestly taxed but as workers, small business people, non-superannuation savers and investors we are very highly taxed on our income and profits compared to the rest of the OECD. 

No wonder those Australians currently in the work force or founding businesses feel hard done by when politicians talk about taxing them even more.

And remember that retirees pay very little tax in Australia thanks to the generous tax regime applying to superannuation benefits and the superannuation funds themselves. 

The fact that our income tax system is also highly progressive means that this tax is also borne by a relatively small group of people - we end up with roughly the top 10% of taxpayers paying nearly 50% of all personal income taxes and the bottom third paying less than 5%. 

This means a very high proportion of Federal Government revenue is reliant on a very small number of individuals. It may be how a progressive tax system is designed to operate but it also means we are very exposed to that cohort simply deciding to live and work elsewhere. In an era where both labour and capital are more mobile than ever before, this is risky.

The latest data published by the ATO (from 2016/17) shows something similar for our corporate income tax base – like our personal taxes, our company taxes depend on a relatively small number of taxpayers. The big four banks (CBA , Westpac, NAB, and ANZ), two biggest miners (BHP Billiton, Rio Tinto), two supermarket giants (Wesfarmers, Woolworths), and Telstra and AMP Limited paid a combined $20.8bn in corporate tax in 2016-17 – representing 45% of all corporate tax paid in Australia.

All in all, then, this is the skeleton in the cupboard that lends itself to the reasonable assertion that Australia’s tax base is far too narrow.

However, none of this answers the obvious question as to why we are a relatively low taxing country when we have such high rates of income taxation.

A large part of the answer is in the table below (the red line is Australia, the blue line is the rest of the OECD):

The proportion of revenue that we raise from indirect taxation in Australia is extraordinarily low (at less than 20% of revenue).

In France (a high taxing country), for example, the proportion of government revenue raised from indirect taxes (mostly VAT) is around 50%.

So there you have it.

Overall, we are a modest to low taxed country but raise most of our revenue via a progressive income tax system that results in a dangerously narrow tax base. Workers, companies, small business owners and savers understandably feel quite highly taxed - because they are.

Most of us know and feel the income tax that we pay but maybe less aware of how little tax we pay elsewhere in our lives. This results in the public and political debate getting skewed into a debate about income taxes.

Unless we are able to broaden the public and political debate on taxation away from income taxes and onto other potential sources of government revenue, we are at risk of being stuck in this groundhog day debate for some time about whether we are a highly taxed country or not.