Opinion & Commentary
Strong case for tax cuts
The Government believes we are, by international standards, a "low tax country" and now the Treasurer has announced an inquiry he hopes will prove it.
According to Peter Costello, "nearly all the figures show Australia as one of the lowest-taxed countries in the OECD". It is true that on the raw figures, Australia 's total tax burden appears relatively low compared with many other OECD countries.
In a paper last year for the Centre for Independent Studies, Peter Burn showed that taxes absorbed 31.5 per cent of Australian GDP in 2002, compared with an OECD average of 36.3 per cent. Ranking the 30 OECD countries from the highest taxing nation to the lowest, Australia came 23rd. This seems to support the Government's argument that taxpayers here have little to complain about.
But these raw statistics conceal more than they reveal. Look at the countries above us, and those below us, on the OECD tax ladder. Two of the biggest economies in the world -- the United States and Japan -- come below us. Along with other crucial Pacific Rim trading partners such as Korea , they have lower tax levels than we do.
The countries above us, by contrast, are nearly all European nations and many of them are tiny. The four highest taxers in 2002 were Sweden , Denmark , Belgium and Finland. While the major powerhouses of the world economy have lower taxes than we do, European minnows are generally taxed more highly. Taken together, the 23 European members of the OECD have a lower total GDP than the US on its own.
Using simple averages to compare Australia 's tax burden with that of the rest of the OECD is therefore misleading, for this gives equal weight to Luxembourg as to the US. If we take account of the size of these different countries before making our calculations, we find we are not a low tax country after all. Australia 's total tax burden is around the OECD weighted average. It could be argued that being an average-taxed country isn't too bad. But we should surely be comparing ourselves with the world's dynamos, not its economic basket cases. Besides, our levels of income tax are way higher than other countries.
Even including the social security contributions which workers in many other countries have to pay, Burn still finds that tax on personal incomes in Australia in 2002 was 34 per cent higher than the weighted average for the whole OECD. So while our total tax burden is about average, income tax here is much more onerous than in most other countries. There is a strong case for reducing it.
To do this, the first priority is to keep government spending in check. This week marks 10 years in power for this government, but taxpayers have little to celebrate. Average incomes rose 33 per cent between 1998-99 and 2003-04, but total income tax revenues rose 36 per cent during the same period. A sustained economic boom should have reduced pressures on government spending, but Canberra has gone on a spending spree. The Treasurer should make a public commitment to cut expenditure as a proportion of GDP back to its 1996 level. This means no new spending program should be introduced unless it replaces an existing program of comparable cost. Once spending is brought under control, the Government should embark on a radical overhaul of the income tax system aimed at increasing efficiency, reducing complexity, improving fairness and rewarding effort.
This will require tax reform, not just tax cuts. For example, 100 new tax breaks have been created since 1996. This has made the tax system more complex, has distorted economic incentives and has kept tax rates higher than they need be. Scrapping most of these allowances would enable tax rates to fall and could get the top personal rate closer to the 30 per cent company rate.
There is also a pressing need to raise the tax-free earnings threshold to reduce the tax paid by low-income households. It is absurd for the tax office to be taking money away from anyone earning more than $6000 a year while Centrelink makes payments to households with incomes of $100,000 or more. A key aim of any reform should be to disentangle the tax and welfare systems.
There is also a strong case for indexing tax brackets. Every year, as inflation pushes up wages, an ever-bigger proportion of people's incomes falls into higher tax brackets. An honest tax system would automatically revise all tax brackets annually in line with inflation. There is no harm in the Treasurer setting up his inquiry, but we already know what the problems are, and what needs to be done to tackle them. Australian workers are over-taxed. With the economy humming and the Budget in surplus, now is the time to do something about it.
Professor Peter Saunders is social research director at The Centre for Independent Studies
