Why it’s a myth that Australia is a low-taxing country

Taxation statistics released by the Australian Bureau of Statistics last week were quite startling in a way that weakens the case for governments to hunt for more revenue in forthcoming federal and state budgets.

The ABS reported that tax revenue shot up by 15 per cent in 2021/22, lifting revenue to almost 30 per cent of GDP, the highest since 2007/08. This refers to tax revenue at all levels of government — Commonwealth, state and local. How this national total is divided up among them is a separate issue, but ultimately it all comes from the same pockets — yours and mine.

It is of interest, however, that Commonwealth tax revenue reached 23.9 per cent of GDP, which was the cap imposed by the previous government on tax receipts and abandoned by the current government. (Receipts refer to cash and revenue to accruals, but where revenue goes, receipts will presumably follow.)

The tax revenue share of GDP — whether for the Commonwealth or the national total — has been higher in the past but only six times during the resources and housing-led boom of the 2000s. Even then, the total never exceeded 30.4 per cent of GDP.

The Commonwealth budget outcomes for the first nine months of 2022/23 suggest the revenue share will rise again to something above 24.0 percent. And the only thing that might stop a new record being set for the national tax revenue ratio will be weakness in states’ property stamp duty revenue. Everything else is booming.

The above figures do not include record state mining royalty revenue, which arcane government finance statistics rules classify as non-tax revenue.

What all this means, quite simply, is that government coffers are brimming with revenue at a time when some economists and think tanks say taxes need to be increased — or tax cuts cancelled — to satisfy the pressure of rising government spending. To be fair, some of those people are talking as much about the future as the present, and some of the current strength of revenue is cyclical rather than structural.

However, the calls for more revenue at a time of near-record revenue strain credulity and sidestep the alternative conclusion that the number one problem is not too little revenue but too much spending.

The argument so often heard is that if only taxes could be lifted by a few tens of billions of dollars a year over time, revenue would grow faster than expenditure and neatly close the gap between them, leading to balanced budgets or surpluses.

But this is something that is only ever likely to happen on an economic planner’s spreadsheet. In the messy real world of budgets, such a vision is a mirage. The reality is that rising revenue would relieve the pressure to restrain expenditure. Revenue would be chasing spending up, and never catch up.

But isn’t Australia a comparatively ‘low tax’ country — a claim repeated most recently in a Grattan Institute pre-budget report?

There are two problems with this story. One is that it depends entirely on the many high taxing countries of Europe. Most North American and Asian countries have tax burdens below or similar to Australia’s while Europe’s — with the exceptions of Switzerland and Ireland — are much higher.

If we are looking for models of economic progress, would we look to Europe — and in particular, to high-taxing countries like Italy and France rather than to the low-taxing star economic performers like Switzerland and Ireland?

The claim that Australia is a low taxing country also depends heavily on the high compulsory social contributions of most other developed countries. On this test the score is: OECD average nine percentage points, Australia zero. If social contributions are taken out of the calculations, following IMF practice for international comparability, then Australia once again is not a comparatively low-taxing country.

Social contributions are mainly employee and employer contributions to state pension schemes. They are legitimately classed as a tax, but the Australian equivalent  compulsory superannuation contributions — are not a tax because they constitute private funding of private retirement benefits. They do, however, have tax-like characteristics insofar as they are a compulsory deduction from take-home pay.

Compulsory super contributions are above 4 per cent of GDP and heading for more than 5 per cent as the Super Guarantee Charge rises to 12.5 per cent. If social contributions are included in comparator countries, then the SGC should be added to the Australian tax burden for comparability, and then once again we do not look like a low taxing country. Certainly, Australia’s private retirement income arrangements should not be taken as an excuse to lift the tax burden to match other countries with predominantly public retirement income schemes.

Whichever way one looks at it, the proposition that Australia is a low tax country is devoid of content as a guide to policy.

Robert Carling is a Senior Fellow at the Centre for Independent Studies.

Photo by Towfiqu Barbhuiya