Australians are paying more personal income tax as a share of government revenue than any other advanced economy, except for the high-taxing Scandinavian welfare state of Denmark, according to an international report that renews pressure on the Coalition and Labor to reform the tax system.
Governments in Australia also raised almost double the amount of revenue from taxes on property compared to other wealthy nations, chiefly due to state-based stamp duty on real estate purchases, the Organisation for Economic Co-operation and Development report said.
Personal income tax revenue rose to 42 per cent of total tax collected by federal and state governments in 2019, nearly twice as much as the OECD average of 23.5 per cent.
The dependence on personal income tax has gradually grown by almost 5 percentage points since 2000, when the GST was introduced by the Howard government in return for personal income tax cuts.
Despite the Morrison government and Labor committing to personal income tax cuts over the next four years, the reductions in tax rates and increase in thresholds will ultimately be wiped out by “bracket creep” – where taxpayers pay more as wages rise.
The report echoes repeated warnings from the OECD, International Monetary Fund and former Treasury secretary Ken Henry’s 2010 tax review that Australia taxes personal income and corporate profits too heavily, and raises too little revenue from more efficient tax bases such as consumption and land.
At the corporate level, Australian companies contribute the fourth most tax as a share of total government tax revenue, at 17.1 per cent, the OECD said.
This is only lower than other mining and oil-rich nations Colombia (24 per cent), Chile (23.4 per cent) and Mexico (20.1 per cent). The OECD average is 9.6 per cent.
Robert Breunig, director of the Tax and Transfer Policy Institute at the Australian National University, said Australia’s tax mix was “out of date”.
“Most economists think this heavy reliance on income-generating activity has negative consequences for economic growth and productivity,” he said.
“That’s why other countries have moved to taxing more passive things like consumption and unimproved land values.”
Despite the large amounts of tax imposed on personal income and business profits, Australia remains a relatively low-taxing country by world standards.
Total tax revenue was 27.7 per cent of gross domestic product (GDP) in 2019, the eighth lowest out of the 38 countries analysed by the OECD.
That’s partly because the high dependence on personal and corporate tax is offset by an under-utilisation of consumption taxes such as the 10 per cent goods and services tax (GST).
At 26.3 per cent of total tax revenue, Australia raised the seventh-lowest amount of tax revenue from goods and services – out of the 38 countries – and this was considerably lower than the OECD average of 32.6 per cent.
On property, Australia ranked the fifth highest in the OECD.
The 9.8 per cent of total tax revenue raised from property was nearly double the average of 5.5 per cent.
The stamp duty slug on home buyers has more than quadrupled in major capital cities over the past 20 years because state governments have failed to adjust the tax in line with the property price boom.
NSW Premier Dominic Perrottet was working on a plan as treasurer to gradually replace stamp duty with an “opt in” land tax for future property buyers.
Mr Perrottet and his new Treasurer Matt Kean last month said they wanted federal government financial assistance to help make the transition, but they may be willing to go it alone.
Federal Treasurer Josh Frydenberg said the government’s $320 billion in income tax cuts (over 10 years) was the largest structural reform in over two decades by “abolishing the 37 cents in the dollar tax bracket and ensuring that 95 per cent of Australians face a marginal tax rate of no more than 30 per cent.”
“Our track record speaks for itself, we have imposed a 23.9 per cent cap on the tax-to-GDP ratio.”
“Labor on the other hand took $387 billion of higher taxes to the 2019 election which would have seen the tax-to-GDP ratio reach 25.9 per cent.
“Senior Labor members, including the shadow treasurer, have said publicly that they are ‘proud’ of Labor’s higher taxes, and have called our personal income tax cuts ‘offensive’ and ‘handouts’.”
Shadow treasurer Jim Chalmers said: “Despite all the spin and marketing the Morrison government is the second highest taxing government of the last 30 years and yet they still have a trillion dollars in debt.”
“Australians aren’t getting the value for money they need and deserve from their taxes under Scott Morrison and Josh Frydenberg.”
After internal debate, Labor has committed to supporting the government’s legislated tax cuts, including stage 3 for high earners from July 2024, which will lift the income threshold for the 45 per cent rate from $180,000 to $200,000.
The OECD report also highlights how the federal government raised the lion’s share of tax revenue – more than any other central government.
“Eight OECD countries have a federal structure,” the OECD noted.
“In 2019, the share of central government receipts in the eight federal OECD countries varied from 29.3 per cent in Germany to 80.8 per cent in Australia.”
The OECD’s Secretary-General is former finance minister Mathias Cormann.