Ideas@TheCentre
Taxing Capital Hurts Labour Too
Last week’s ALP National Conference passed a resolution sponsored by the party’s left faction and left-wing unions calling on the Henry tax review to ‘meet the demands of society and not the ideologically based demands for lower business taxation.’ Like all the resolutions emanating from the National Conference, this call is not binding on the Rudd government. But it would be unfortunate if the government were to heed the left’s call, not least for the workers it claims to represent.
The Henry tax review has already drawn attention to the fact that Australia has the highest reliance on capital taxation in the OECD, with around 33% of all tax revenue derived from taxes on capital income. The overall tax burden on capital is around 11% of GDP, the fourth highest in the OECD, while the tax burden on labour is 12% of GDP, the fourth lowest in the OECD. Australia’s corporate tax rate is now above the OECD average, in part due to a trend to lower corporate taxes in other countries with whom Australia is competing for global capital. Australia’s corporate tax revenue as a share of GDP is the fourth highest in the OECD.
In addition to company taxes, Australia also heavily taxes the returns to saving through relatively high top marginal tax rates on capital gains and interest income.
It is hardly surprising then that the Henry tax review has identified capital taxation as a priority for reform. However, it would be wrong to conclude that reductions in the tax burden on capital must come at the expense of labour.
The high tax burden on capital lowers investment in the Australian economy and thus the ratio of capital to labour. This in turn tends to lower productivity growth, the main driver of both economic and real wages growth. The tax burden on capital is thus ultimately shifted back on to labour in the form of lower real wages growth.
The union movement is not doing its members any favours by defending Australia’s relatively high tax burden on capital. Instead, it should embrace efforts to improve the efficiency of the tax system.
Dr Stephen Kirchner is a Research Fellow at the Centre.
