[LINK] Why so many of us think we're overtaxed
Mon, 24 Feb 2003 20:55:57 +1100
Lack of funds is often cited as a reason too little is done about
rural telecommunications. Ross Gittins' column from today's Sydney
Morning Herald provides food for thought. Perhaps the problem is
we're not taxed enough.
Nah, too radicle!
Why so many of us think we're overtaxed
February 24 2003
Did you know Australia is the sixth most highly taxed country among
29 members of the OECD? And did you know that, expressed as a
proportion of GDP, Australia's total taxation comes in almost 4
percentage points higher than the OECD average?
These startling findings come from a recent report by the chartered
accountants KPMG, "Australian Taxation in an International Context".
Among other little-known discoveries the report makes is that we have
the third highest level of taxation on employment (through payroll
tax and fringe benefits tax), making us the country second most
reliant on taxing employment.
If you didn't actually know these things, you probably don't find
them at all hard to believe. But you should - because they're all far
from the truth.
They are, in fact, fairy stories. As KPMG cheerfully admits when you
read the fine print, these unflattering comparisons have been
achieved by the simple expedient of excluding from the calculations a
whole category of taxation known as social security contributions.
It so happens that every OECD country levies social security
contributions bar Australia and New Zealand. On average over those
countries, the euphemistically named "contributions" account for more
than a quarter of total tax collections and about 10 per cent of GDP.
So when you pretend this huge tax category doesn't exist, guess what
happens. Australia suddenly shoots up the league table of the heavily
Not a bad trick, eh? Who said chartered accountants lack imagination?
If you look at the official, undoctored OECD figures for 2000, you
find they tell a very different story. Rather than being the sixth
highest taxed country, we're actually the sixth lowest (and that
includes such lavish welfare states as South Korea and Mexico).
If you take all taxes levied by all levels of government and express
them as a proportion of national income (as the OECD does), our tax
burden is 31.5 per cent of GDP. And that's not 4 percentage points
higher than the OECD average, it's 6 percentage points lower.
As for KPMG's line about our heavy reliance on "the taxation of
employment", it's only correct in a technical sense. The countries
that levy social security contributions impose them partly on
employees and partly on employers.
In Canada the employer's contribution is about 7 per cent of salary,
in the US it's 8 per cent and in Britain it's 9 per cent. This
contribution is very similar to our payroll tax (and is a much
heavier impost), but the OECD puts it under the social security
heading, not the payroll heading.
So the notion that Australia is heavily into "taxing employment" is
another figment of KPMG's fevered imagination. The guys saw a
technical loophole and they leapt through it.
But why would a big-name firm such as KPMG produce such a - shall we
say - "excentric" piece of analysis? Because it knew what its
customers wanted to be told and, like all good profit-maximisers, was
anxious to keep the customer happy.
So why are so many of us so convinced we're overtaxed? Because we're
so mesmerised by the most visible of the many taxes we pay - income
tax - and because it is true that Australia relies more heavily on
income tax (narrowly defined) than most other countries do.
But it's also because most Aussies are so ignorant of how other
people's tax systems work. Take the case of the US. As soon as your
average Aussie businessman hears that America's top tax rate is 38
per cent and cuts in at a much higher level than our 48.5 per cent
from $60,000 a year, he needs no further convincing that Australians
are hugely overtaxed.
This has to be an illusion, however, because if you take all the
taxes we pay, they add up to 31.5 per cent of GDP, whereas for the US
it's 29.6 per cent. So, though it's true the Americans don't pay a
lot of tax, it's also true that we don't pay a lot more than they do.
So how is the illusion explained? The biggest part of the explanation
is those social security contributions.
Our federal government covers the cost of pension payments, dole
payments and 101 other things with one big tax called income tax,
whereas everyone else breaks it up into three different taxes to make
it more psychologically digestible (that is, less visible).
Americans wouldn't forget that, on top of their 38 per cent top
marginal income-tax rate, 8c in the dollar is taken out of their pay
as their employee's social security contribution.
And, if they had any degree of economic literacy, they'd realise that
the 8c in the dollar employer's contribution was coming out of their
own pocket as well.
Yet another thing they'd know - as most Australians forget - is that
Americans have to pay state income tax as well as federal. Add about
another 9c in the dollar on top of that oh-so-low 38 per cent we
If that isn't enough to disabuse you of the illusion that Americans
pay much less tax than we do, here's a final difference to remember.
The tax we pay to local government constitutes just 3 per cent of our
total tax burden. In the US local taxes take up 12 per cent.
Last week the OECD issued the results for 2002 of its annual study of
what proportion of their wage the average production worker loses in
income tax and employee's social security contributions. In
downtrodden Australia, it's 23.6 per cent. In the US it's 24.3 per
cent and in Canada it's 25.7 per cent.
Now, I should tell you that the OECD's figures for total taxation as
a proportion of GDP make no allowance for our compulsory
superannuation contributions of 9 per cent of employees' wages
(though they do allow for the tax on those contributions), and some
people argue that they should.
If you did include compulsory super it would raise our total taxes by
only 3 or 4 percentage points of GDP. We would still be below the
But I think the OECD is right not to include the super contributions.
They're not a tax, they're compulsory saving. The (after-tax)
contributions never get into the government's hands.
And they're not thrown into a pot where what you put in and what you
eventually get back bear little relation. Every after-tax cent
remains your money in your name. You know exactly where it is, how
much it is and when you can get your hands on it.
Doesn't sound like any tax I've ever heard of.
Ross Gittins is the Herald's Economics Editor.
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