Contrary to common belief, Australia is a low-taxed nation among the world’s developed countries. On total taxation and other revenue, eight nations are taxed above 40 per cent of GDP, with Finland on top at 54 per cent (see chart). There are more than 15 nations between 20–40 per cent. Most of the nations that are taxed below 20 per cent of GDP are emerging or developing economies.
Australia at 28 per cent of GDP sits at the lower end of the developed nations with Mexico, Turkey and the US below us. Despite being lower on the ladder, the US is running large deficits that put actual government spending higher than Australia — the US has only run a positive balance for four of the past 40 years, compared with Australia’s one third of the time.
The surpluses generated under the 11 years of Howard-Costello leadership of the Coalition government up to 2007 eradicated Australia’s accumulated national debt. And despite the subsequent global financial crisis and deficit spending, the national debt remains among the lowest in the developed world. The government is predicting surplus budgets into the 2020s, beginning with FY2019.
The three tiers of government in Australia had a gross income in FY2019 of $667b (12.1 per cent of the nation’s total revenue of $5.5 trillion). Taxes comprised 83 per cent of all governments’ revenue, the balance being other income from interest and government business enterprise profits.
Australian GST, at a nominal 10 per cent of revenue, compares with the 18 per cent OECD average and contributes eight per cent of all our taxes. However, this 10 per cent rate is effectively little more than half our exemptions. As a result, our individual and business taxes sit way above OECD averages. While our headline company tax rate is 30 per cent, there is also a lower small business company tax rate (27.5 per cent).
Direct business income taxes are 18 per cent of all taxes — more than 20 per cent if the tax component of the “mixed income” of unincorporated businesses (sole traders, partnerships) is included. But if we aggregate all the taxes our 2.3 million businesses collect or pay directly to governments, it tells us a more complete story. It adds up to 49 per cent of all taxes, meaning it is the business sector carrying the heavy load for governments in paying taxes. And the business sector collects almost all taxes, including individual income taxes. Business income taxes constitute just over a third of all the business taxes companies pay to governments. So, while our corporate income tax is high at 30 per cent, it is in fact the other taxes that dominate. If our GST rate was in line with the OECD average, it would jump to more than half of all business-collected taxes, enabling the abolition of payroll tax, a lowering of the direct business tax, and a reduction in direct individual taxes.
At 30 per cent, Australia is among the more heavily taxed nations on business income. The US sits at 21 per cent following the 2017 Tax Cuts and Jobs Act, which saw a cut in corporate taxes from 35 per cent. This has come at the cost of a worsening budget deficit and growing national debt. And some US state governments also levy corporate income taxes. (Australia’s dividend imputation system means that like-for-like headline rate comparisons need to be qualified.)
Australia’s corporate tax rate should be around 25 per cent. This won’t happen unless we have a proper and comprehensive review of taxation. Successive federal governments have baulked at this proposition — choosing populism over rationality and reform. However, lowering the corporate tax rate to 25 per cent would only increase after-tax profits by around seven per cent. Much better would be to emulate US world best practice methods of running businesses and achieve a near doubling of the return on shareholder funds after tax (ROSF).
Statistical sources: IMF, OECD, ABS, IBISWorld