How highly taxed are we?

According to the Australian Bureau of Statistics, total tax collections in Australia are currently around 31.5 per cent of GDP. In 1965 the share of tax in Australia’s then much lower level of GDP was around 22 per cent.

The introduction of the new tax system has not stemmed the rising tide of Australian taxation. The share of tax in GDP has continued to rise since 2000.

This steady upward drift in taxation does not stop some arguing for further increases in Australia’s tax level. For example, the eminent economist and former Treasury adviser Michael Keating recently attracted a lot of attention when he claimed that tax in Australia is too low and that “the Australian economy could tolerate a significant increase in the ratio of taxation to GDP without great difficulty”.

In recent times two prominent interest groups have expressed similar sentiments. Both the Australian Council of Trade Unions (ACTU) and the Australian Council of Social Service (ACOSS) have suggested that Australia’s level of taxation is relatively low and should be increased.

In all these cases support for these claims rely on comparisons with the simple average of tax levels in OECD countries. The most recent OECD data show that Australia is the eighth lowest taxing of the 30 OECD countries. The simple average level of taxation for the whole OECD is 36.3 per cent of GDP.

Statistics, however, can be deceptive. In particular, simple averages can be the statistical equivalent of ignoring the gorilla in the corner of the room.

The simple averages ignore the very wide disparities in economic significance between different OECD countries. For instance the United States, which accounts for around 40 percent of the GDP of all the OECD countries, is about 500 times bigger than Luxembourg. The simple average treats the US and Luxembourg as equally important.

In the OECD there are two gorillas in the corner. Together the US and Japan comprise about 55 per cent of the GDP of all OECD countries. Both countries are significantly lower taxing than Australia. When the tax levels in OECD countries are weighted by economic size the OECD level of taxation is 31 per cent. This is lower than the Australian level of taxation.

Comparing Australia’s level of taxation with the simple average of tax levels in all OECD countries also ignores the fact that Australia’s trade is spread very unevenly between different OECD countries. Australia’s two largest trading partners are the US and Japan who make up about half of Australia’s total trade with OECD countries. Korea, which is also lower taxing than Australia, makes up another 10 per cent.

When the OECD data are weighted to reflect the importance of different countries in Australia’s two-way trade, the average level of taxation in the OECD is 30.5 per cent. This is also below the level of taxation in Australia.

The simple averages also overlook the differences in proximity to Australia. Over three quarters of OECD members are European countries. These countries only account for around 35 per cent of the GDP of all OECD members and less than 20 per cent of Australia’s two-way trade. Using simple averages for the OECD countries creates an unwarranted and misleading Eurocentric bias.

Although the dominant cultural heritage in Australia is European (including the UK), this should not disguise where we are, whom we trade with and, increasingly, who we are. With the possible exception of our trans-Tasman cousins, Australia is about as far as you can get from Europe. A measure of taxation that, effectively, is three quarters European is clearly an inappropriate benchmark.

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.