Australia’s real tax revenue problem

Australia has a problem with its tax revenue: it is too high. Yet we are seeing taxes go in exactly the wrong direction, with a tax hike of 12.7% per person forecast over the next five years in real terms (after inflation).

Historical comparisons support the case against these tax increases. The federal government’s tax burden is slightly above the historical average, but is forecast to grow sharply, and be $29.6 billion above the average in five years’ time — or $1,228 per person. The tax burden of all Australian governments combined is much further above average and set to grow as well.

International comparisons also argue against tax increases. Australia’s total tax burden is above the developed world average, based on IMF and World Bank data. Australia is even further above the average for the whole world. In addition, the revenue from personal and company tax is substantially above developed world averages.

But the most important argument against the high and growing tax burden is the costs this imposes. Based on Treasury forecasts, the increase in personal tax alone will cut GDP by $376 per person, a figure the Treasury says is large. The hike in the overall tax burden would have greater costs.

Conversely, the arguments in favour of a high and growing tax burden are without foundation:

• We don’t need tax increases to close the budget deficit. In previous years when there was a small deficit or surplus, tax was around current levels, while spending levels were (much) lower. So historical comparisons say that the burden of budget repair should come entirely from spending cuts.
• The end of the mining boom does not argue for tax increases, because the boom now has a negligible effect on the budget. This also means revenue shortfalls (compared to forecasts) do not argue for higher taxes.
• Taxes should not be higher due to tax avoidance: such an approach would put the greatest burden on those that don’t avoid tax, leave the most successful tax avoiders unaffected, and encourage more tax avoidance which is supposedly the problem.

All these arguments are considered further in my CIS research report The case against tax increases in Australia: The growing burden which was released this week.