Is Australia really over-reliant on income taxes?

Writing in The Conversation, Ian McAuley (University of Canberra) challenges the Treasurer's opinion that Australia is over-reliant on income tax. While the author's analysis and key points are generally sound, and the Treasurer's analysis is shown to be too simplistic, readers should also be aware that Australia does have a unique private superannuation based retirement-incomes policy whereas most other countries fund a public system through income taxes (but the Treasurer doesn't use this point to reinforce his argument) - this is just one example of why international comparisons of taxation are fraught.

In an opinion piece in The Australian on Monday, Treasurer Hockey suggested that Australia collects too large a proportion of its public revenue through income tax.

He wrote: “The problem is we have an over-reliance on personal income tax to support our revenue base. Our largest source of tax revenue is personal income tax.”

And he went on to say: “When personal income tax is calculated as a proportion of total tax revenue, Australia’s taxation level is the second highest among OECD countries.”

At first sight, his assertion certainly checks out. Initial analysis of the OECD statistical database reveals that of the OECD countries, only Denmark collects more of its revenue through taxes on individuals. On average personal income tax comprises about a quarter of public revenue in OECD countries, while in Australia it is closer to 40%. A comparison across OECD countries is shown in Figure 1 below.

Source: http://stats.oecd.org/

But this finding needs to be seen in context. While there is a widespread public perception that Australia is a high-taxation country, the reality is that Australia is one of the more lightly taxed of all developed countries. In 2013 (the latest year for which comparative data is available), Australian taxes across all tiers of government were 27% of GDP, compared with the OECD average of 34%. Of the tax we do collect a large proportion is in the form of personal income tax, but because our total collection is low, income tax forms a large proportion of that amount.

When we re-analyse the same data to consider income taxes as a proportion of GDP a different picture emerges, as shown in Figure 2. At 11% of GDP, our dependence on income tax is above the OECD average of 9%, but it is significantly lower than in many other OECD countries.

Source: http://stats.oecd.org/


What is notable from Figure 2 is that more prosperous countries in general tend to be reliant on income taxes. While the OECD is traditionally seen as a “rich countries' club”, expansions of its membership over recent years have brought that generalisation into question. It now includes Chile and Mexico, many eastern European countries re-establishing their economic bases after decades of central planning, and the struggling Mediterranean countries.

When analysis is restricted to a high-income OECD countries – those countries with per-capita incomes above $US36,000 – a different picture emerges, as is shown in Table 1. At 10.7% of GDP, Australia’s income tax revenue is about on the average of these countries (10.5% of GDP).

Income and taxes, 2013 - high income OECD countries

-	GDP Per head, $US '000, PPP	Taxes as percentage of GDP	Taxes on individuals as % of GDP
Japan	36.2	29.5	5.5
France	37.6	44.0	7.9
United Kingdom	38.3	33.0	9.1
Finland	40.0	42.8	12.6
Belgium	41.9	44.0	12.2
Iceland	42.0	35.3	13.2
Canada	43.0	30.7	11.2
Germany	43.1	36.5	9.3
Denmark	43.8	47.2	23.9
Sweden	44.6	42.3	11.9
Australia	44.7	27.3	10.7
Austria	45.1	41.7	9.5
Ireland	45.6	27.3	9.1
Netherlands	46.7	36.3	7.3
United States	53.0	24.4	9.2
Switzerland	56.9	26.9	8.5
Norway	65.6	42.3	9.9
Luxembourg	92.8	38.5	8.4
Average	47.8	36.1	10.5

Source: http://stats.oecd.org/

It is understandable that prosperous developed countries rely comparatively heavily on personal income taxes. They generally have a significant middle class, they have taxation authorities with the capacity to ensure a high degree of compliance, and their wealthier citizens aren’t about to emigrate to find better places to live.

This brief analysis is a reminder that we need to be wary of politicians’ broad statements on taxes. There is a political temptation to set the scene for income tax cuts in a pre-election budget, but, given Australia’s general low level of taxes and high fiscal deficit, the more compelling question should be about improving our public revenue.

This article is republished under Creative Commons licence.