Ideas@TheCentre

Tax freedom at last

This Sunday is Tax Freedom Day! It is the day when Australians stop working for the government and begin working for themselves. It is the point in the year when the average Australian has theoretically paid off their annual debt to the government, and is able to keep the fruits of their labour henceforth to spend however they choose.

A Tax Freedom Day on 7 April means that roughly 26% of the wealth created by each working Australian throughout the entire year is sacrificed to pay for government services.

This year compares rather well against recent years. Throughout the 2000s, Tax Freedom Day has on average fallen on 19 April, which implies that Australians today are working less for the government and more for themselves.

This is a comforting statistic, but it is not the whole story.

The real impact of government largesse is not how much it taxes but how much it spends, for any shortfall in revenue creates a deficit which must be serviced in the future. Deficits mean higher taxes and less economic freedom for Australians.

We should recall that Treasurer Wayne Swan recently complained of collapsing commonwealth tax revenues since the Global Financial Crisis. What has happened in recent years is that tax revenue has declined, but spending has not declined simultaneously. Instead the government has recorded consistent deficits since the 2007-08 financial year.

If we were to calculate Tax Freedom Day according to spending, the situation would become more ominous. Government spending amounts to 34.5% of GDP, implying that Tax Freedom Day would fall on 7 May. Australians are, in fact, working over four months to pay for their government.

The trend towards greater government spending needs to be reversed. The CIS recently launched a campaign aimed at reducing the size of government. The campaign, called Target 30, provides practical and pragmatic solutions to reduce government spending to below 30% of GDP within the next ten years.

Should our ambitions be achieved, Tax Freedom Day under a balanced budget would fall on 21 April. This is an important and attainable goal that would reduce the tax burden on working Australians and ease their cost of living pressures.

Alexander Philipatos is a Policy Analyst at The Centre for Independent Studies.