A Tax by Any Other Name


Spare a thought for business figures Dick Warburton and Peter Hendy. They’ve been given just five weeks to produce an ‘authoritative statement’ on how Australia’s tax take compares to that of other countries.

And every second member of the commentariat is telling them that the task is dead easy.

Andrew Leigh of the Australian National University says Warburton and Hendy are being asked to find out what anyone who uses Google can get from a public website. Malcolm Turnbull says a lot of the work has been done before. And economist John Edwards dismisses the exercise, saying there is ‘absolutely zero point in having an inquiry to ascertain facts that are well known.’

But if the facts are so well known, why is it that all the accounts we get of them seem different?

Thanks to Sean Leahy.

The truth is that it is impossible to authoritatively compare Australia’s tax take to that of other countries. The reasons why this is so tell us a lot about the meaninglessness of the question.

I’ll explain.

The Treasurer has asked Warburton and Hendy to focus their investigation on those countries in the rich man’s club: the OECD. At first glance, Australia appears to be a heavy taxer compared to the other OECD members, particularly when it comes to income tax. Official figures show that in 2004 average Australian workers handed over 24 per cent of their income in income tax. By contrast New Zealanders paid 21 per cent, Germans 20 per cent, residents of the UK or the US 16 per cent, and average workers in Japan and Poland only 6 per cent.

Rich nations other than Australia also impose so-called ‘social security contributions’. They are extracted from both workers and their bosses. Germany, for example, hits workers for 21 per cent of their income, and their bosses for another 21 per cent. The UK charges workers 16 per cent and employers 10 per cent, and the US 8 per cent and 8 per cent. Even low tax Japan charges workers 12 per cent and employers another 12 per cent.

When compulsory social security contributions are counted as taxes (as they should be) it is the rest of the OECD , rather than Australia, which looks high taxing.

The graph below, prepared by the Australian Treasury, shows that by this measure Australia collects less tax as a proportion of national income than all but seven of the OECD’s 30 members.

But this comparison also leaves something out.

Australia uniquely enforces the collection of another impost, very similar to a tax. Our Tax Office compels employers to pay nine per cent of each of their employee’s earnings into a superannuation fund.

It is true that the money goes into private rather than government hands, but it does it at government insistence in order to fund retirement, just as it does in those OECD nations that impose compulsory social security contributions.

Compulsory superannuation contributions are a tax by any other name. That’s certainly the view of Dick Warburton who will be conducting the Treasurer’s inquiry. Last week he aroused the ire of the father of Australia’s superannuation system Paul Keating by saying plainly: ‘I definitely do call it a tax because it is money taken from the people to do the same sort of task that we pay taxes for.’

For what it is worth, when you count the Superannuation Guarantee as a tax (as I think you should) Australia’s total tax take looks pretty unexceptional compared to the rest of the OECD.

By now you might be forgiven for wondering whether such an exercise is worth very much.

Ask yourself this: What if Australia removed its system of compulsory superannuation contributions? We would then be called a ‘low tax country,’ but what would have changed? Without compulsion, the well-off among us would still put aside money for their old age (perhaps even just as much money as before, and perhaps to the same fund managers).

Very little might have changed when it came to financial flows except that we would be called a ‘low tax country.’

Similarly, Australia could become a ‘low tax country’ if our governments stopped providing free schools. But the drain on parents’ resources would be little changed. They would still have to pay for schooling perhaps just as much as before, perhaps more but directly out of their own pockets with the money they no longer contributed in tax.

Working out whether Australia is a high-taxing or a low-taxing country, as the Treasurer has asked his Task Force to do, is meaningless without also looking at what the tax buys. You wouldn’t judge an internet plan or a holiday package by assessing whether it was high-price or low-price and leaving it at that. You would also want to look at what that high or low price bought.

To his credit the Treasurer recognises this. The terms of reference he has given Warburton and Hendy note that: ‘Some countries have a much larger/smaller government sector than Australia, and therefore require a higher/lower level of taxes.’

But he doesn’t seem to have followed through the implication. The team should be examining value for money, not the absolute amount of whatever it is they choose to define as ‘tax.’

That would be an inquiry worthy of a future Prime Minister, and certainly worthy of more than the five weeks and the handful of researchers that will be available to Warburton and Hendy.

Launched in 2004, New Matilda is one of Australia's oldest online independent publications. It's focus is on investigative journalism and analysis, with occasional smart arsery thrown in for reasons of sanity. New Matilda is owned and edited by Walkley Award and Human Rights Award winning journalist Chris Graham.