It is a myth that Australia is a low-tax country, because we're not. In fact we're on the verge of becoming a country with higher than average taxes. If, next year, we're going to have a debate about tax reform, at the very least we should have the facts in front of us and know what we're talking about.
The claim that Australia is a "low-tax" country is based on data collected and presented by the Paris-based Organisation for Economic Co-operation and Development (OECD). It is a claim the Commonwealth Treasury department regularly repeats. Treasury's Guide to the Australian Tax System says, "Australia's tax-to-GDP ratio is low by international standards". The Henry tax review said the same thing. Last week the OECD released its most recent tax data, which was from 2012. The OECD calculated that in 2012 the tax-to-GDP ratio across all its 34 member countries was 33.7 per cent. Australia's tax-to-GDP ratio was asserted to be 27.3 per cent. This figure was unquestioningly reported by the media as proof of our "low" tax burden.
The trouble is that, put bluntly, the OECD is not comparing apples with apples. What the OECD is doing, and has been doing for years, is more like comparing oranges with vacuum cleaners.
When the OECD calculates taxes in Australia, it includes taxes collected by local, state and federal governments. However, compulsory superannuation contributions paid by employers are not counted as taxes, nor are the private health insurance premiums Australians are required to pay to avoid the imposition of the Medicare surcharge. Superannuation and private health insurance are not regarded as taxes by the OECD because they're not payments to the government. In contrast, the OECD does count as taxes in other countries the amounts paid through the tax system to fund retirement benefits.
This point about the problems with the OECD's methodology is not original, it's been made many times. In these pages over the years former senior Treasury officials such as Greg Smith and Geoff Carmody have identified how you can't compare tax systems without acknowledging Australia's unique system of compulsory superannuation.
When superannuation and health insurance are counted as taxes, Australia's tax-to-GDP ratio starts to look very different.
I did the calculations as part of my research for a recently published report, The Australia "low taxing country" myth. If superannuation and health insurance are counted as taxes, Australia's tax-to-GDP ratio in 2012 was 33.5 per cent. That's at a lot closer to the OECD average of 33.7 per cent than the figure of 27.3 per cent that got all the publicity.
Early next year the Abbott government will launch its white paper on tax reform. Already the preferred direction of the government is obvious. But increasing the GST is not "reform". And simply swapping one tax for another isn't tax reform either. The only reform worth talking about is that which cuts the overall tax burden — and the chances of such an outcome from the white paper process are practically zero. Instead of arguing whether the GST should be 10 per cent or 15 per cent or 18 per cent, the government could spend its time far more productively if it talked about the policy reforms that need to be done urgently, instead of the reforms that are simply nice to have. Changes to industrial relations are urgent. And deregulation is urgent. The costs that businesses face are a bigger issue than the taxes they pay. As Gina Rinehart said recently, her new Roy Hill iron ore mine in the Pilbara required 3000 separate approvals and licences.
Some people worry Australia is on its way to becoming like Europe. Well, they shouldn't worry. With a tax-to-GDP ratio of 33.5 per cent we're already there. Our employment laws are European-like, only worse. Last year when Ford announced it would stop making vehicles in Australia, the local head of the company, Bob Graziano, said it cost twice as much to build a car in this country as in Europe.
Australians are starting to realise they live in a country that is heavily regulated and has high costs. Soon it will begin to dawn upon them they're not living in a low-tax country either.
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