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.
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.
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.
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