Are Australians paying too much income tax? 6 tables on our ranking compared to the rest of the world

Australians pay too much income tax – or at least some argue that.

The economics editor of the Australian Financial Review, John Kehoe, for example, noted:

Australians pay more personal income tax as a share of government revenue than any other advanced economy except Denmark’s highly taxed Scandinavian welfare state.

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

Too much dependence on the taxation of productive workers and business income weakens the incentives to work, save and invest.

Perhaps even more scathing is that the AFR considers New Zealand to have a better income tax system. New Zealanders pay 10.5% on their first NZ$14,000 (then 17.5% up to NZ$48,000), while Australians enjoy a tax-free threshold up to AU$18,200. FRANCE said this:

creates tax penalties against work incentives that partly explain New Zealand’s labor force participation rate which is about 5% higher than Australia’s.

Are these problems really a problem? If there is a need for tax reform, what type of reform?

High personal income tax

In 2019 (the most recent year for which the OECD has complete statistics), Australia ranked second among OECD members for personal income tax as a percentage of total taxes.

In fact, it has placed second or third in 36 of the last 40 years and fourth in the other four years, swapping places with New Zealand and the United States.

But that’s only part of the picture

Overall, Australia’s tax level, measured as a share of GDP, is relatively low – 27.7% compared to an OECD average of 33.4%.

This makes Australia the 29th lowest taxed country of the 38 members of the OECD.

Other countries have social security contributions

The main reason why Australia ranks so well on personal income tax is that Australians do not pay separate social security contributions.

Australia, New Zealand and Denmark fund social security from general government revenues. The other 35 OECD countries levy specific taxes on employers and employees to fund social security systems (unemployment assistance, old-age and disability pensions, etc.)

These represent on average 25.9% of total tax revenue, or nearly 9% of GDP, across the OECD.

Employee social security contributions are very similar to income tax. They are generally collected in the same way as income taxes and counted as direct taxes on households or individuals in income surveys.

Although employers also pay social security contributions, the evidence suggests about two-thirds of them are actually paid by employees through lower wages.

In fact, if we add personal income taxes and social security contributions, then Australia, rather than having the second highest share of income tax in the OECD, has the eighth weaker.

What about retirement pension?

Some say that Australia’s mandatory pension scheme, in which employers pay 10.5% of an employee’s salary as a super, should be taken into account in these tax measures, because it is similar to social security contributions in other countries.

12 other OECD countries have mandatory employer-paid private pension schemes.

Employers pay this money directly into private accounts, not to the government, so it does not meet the definition of a tax.

But for the sake of discussion, we can account for super payouts using “tax wedge“Data.

Combine Mandatory Payments

A tax wedge is the ratio of the amount of taxes paid by an average worker (assumed to be single with no dependents) to the corresponding total labor cost to the employer.

The important point here is that the gap data includes both what employers pay as mandatory private payments and as mandatory government social security payments.

On this measure, Australia’s direct tax burden is the 11th lowest in the OECD.

Claims that we have very high personal income tax shares are only part of the picture. The superannuation does not change the story significantly.

What about New Zealand?

New Zealand collects more revenue from consumption taxes – 12.5% ​​of GDP in 2019, compared to 7.3% for Australia.

But he still collects more income tax – 12.4% of GDP against 11.6%. Its total level of taxation is 33.4% of GDPagainst 27.7% for Australia.

The case of tax reform

Still, there are things to learn from New Zealand.

The Australian system could be better structured. As Minister of Finance to Louis XIV, Jean-Baptiste Colbert (1619-1683), said that the art of taxing consists in “plucking the goose so as to obtain the greatest possible quantity of feathers with the least possible whistle”.

Income taxes are very visible. It can make us more ready to believe that we are heavily taxed. Consideration should be given to tax reforms that generate adequate revenue in a more equitable manner.

New Zealand is in the process of making this change, with its proposal Social unemployment insurance scheme financed by a levy of 1.39% on employers and workers.

Read more: Beyond GDP: Jim Chalmers’ historic moment to build a welfare economy for Australia

Last month, Australian Treasury Secretary Steven Kennedy said in a speech it was possible for the government to spend more on “life-enhancing” things, such as better care for the elderly and services for people with disabilities, “while reducing the pressures resulting from poorly designed policies”:

We will need a fit-for-purpose tax system to pay for these services that appropriately balances equity and efficiency. It is achievable.“

Given the inevitable challenges of an aging population, climate change and international uncertainty, anything that advances the national conversation from misleading comparisons with other nations can only help.

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