Do Australians pay too much income tax? 6 charts on how we rank against the rest of the world

Australians pay too much income tax – or so some argue.

The Australian Financial Review’s economics editor, John Kehoe, for example, has noted^[1]:

Australians are paying more personal income tax as a share of government revenue than any other advanced economy, except for the high-taxing Scandinavian welfare state of Denmark.

And the day after the federal election, the AFR editorialised^[2]:

Too heavy reliance on taxing productive workers and business earnings blunts incentives to work, save and invest.

Perhaps even more stinging is that the AFR considers New Zealand to have a better income-tax system. New Zealanders pay 10.5%^[3] on their first NZ$14,000 (then 17.5% up to NZ$48,000), while Australians enjoy a tax-free threshold up to A$18,200^[4]. The AFR says^[5] this:

creates tax-penalty work disincentives that partly explain New Zealand’s approximately 5% higher rate of workforce participation than Australia.

Are these issues really a problem? If there is a case for tax reform, what sort of reform?

High individual income tax

In 2019 (the most recent year for which the OECD has complete statistics^[6]), Australia ranked second among OECD member on personal income tax as a share of total taxes.

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

But that’s just part of the picture

Overall, Australia’s level of taxation, measured as a proportion of GDP, is relatively low – 27.7% to the OECD average of 33.4%.

That makes Australia the 29th lowest-taxing nation of the OECD’s 38 members.

Other nations have social security taxes

The main reason Australia ranks so highly on individual income tax levels is because Australians don’t pay separate social security taxes.

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

These account for an average 25.9% of total tax revenue, or close to 9% of GDP, across the OECD.

Employee social security contributions are very similar to income taxes^[7]. They are generally collected the same way as income taxes, and counted as direct taxes on households or individuals in income surveys.

Though employers also pay social security taxes, evidence suggests^[8] about two-thirds of these are effectively paid by employees through lower wages.

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

What about superannuation?

Some say Australia’s compulsory superannuation scheme, in which employers pay 10.5% of an employee’s wage as super, should be counted 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 doesn’t meet the definition of a tax^[9].

But for argument’s sake we can factor in super payments using “tax wedge^[10]” data.

Combining mandatory payments

A tax wedge is the ratio between the amount of taxes paid by an average worker (assumed to be single without dependents) and the corresponding total labour cost for the employer.

The important point here is that wedge data include both what employers pay as mandatory private payments and as mandatory payments into government social security.

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

So claims we have very high shares of personal income taxes are only part of the picture. Superannuation does not change the story significantly.

So what about New Zealand?

New Zealand does collect more revenue through consumption taxes – 12.5% of GDP^[11] in 2019, compared to 7.3% for Australia.

But it still collects more in income taxes – 12.4% of GDP compared to 11.6%^[12]. Its total level of taxation is 33.4% of GDP^[13], compared to 27.7% for Australia.

The case for tax reform

Even so, there are things to learn from New Zealand.

Australia’s system could be structured better. As Louis XIV’s finance minister, Jean-Baptiste Colbert^[14] (1619-1683), said, the art 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 highly visible. This may make us more ready to believe we are highly taxed. There is a case for considering tax reforms that deliver adequate revenue more fairly.

New Zealand is in the process of this change, with its proposed Social Unemployment Insurance scheme^[15] being funded by a 1.39% levy on employers and workers.

Read more: Beyond GDP: Jim Chalmers' historic moment to build a well-being economy for Australia^[16]

Last month the Australian Treasury’s secretary, Steven Kennedy, said in a speech^[17] it was possible for the government to spend more on things “that improve lives”, such as higher-quality aged care and disability services, “while reducing pressures arising from poorly designed policies”:

We will need a tax system fit for purpose to pay for these services, that appropriately balances fairness and efficiency. This is achievable.“

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

References

1. ^{^} has noted (www.afr.com)
2. ^{^} editorialised (www.afr.com)
3. ^{^} 10.5% (www.newzealandnow.govt.nz)
4. ^{^} up to A$18,200 (www.ato.gov.au)
5. ^{^} says (www.afr.com)
6. ^{^} complete statistics (www.oecd.org)
7. ^{^} very similar to income taxes (www.jstor.org)
8. ^{^} evidence suggests (voxeu.org)
9. ^{^} definition of a tax (treasury.gov.au)
10. ^{^} tax wedge (data.oecd.org)
11. ^{^} 12.5% of GDP (data.oecd.org)
12. ^{^} 12.4% of GDP compared to 11.6% (data.oecd.org)
13. ^{^} 33.4% of GDP (data.oecd.org)
14. ^{^} Jean-Baptiste Colbert (www.economist.com)
15. ^{^} Social Unemployment Insurance scheme (www.aph.gov.au)
16. ^{^} Beyond GDP: Jim Chalmers' historic moment to build a well-being economy for Australia (theconversation.com)
17. ^{^} in a speech (treasury.gov.au)