There are many different ways of comparing the taxation systems of different countries — from aggregate measures to measures that focus on individuals, levels of government or particular taxes. Each measure has strengths and weaknesses, and none may be definitive in its own right. Together they paint a picture of how taxation systems in different countries compare. They also need to be placed in the overall context of the countries being compared and not considered in isolation from broader economic issues.
This chapter provides a high level overview of these measures and how Australia’s taxation system compares with that of other countries. Drawing largely on OECD data, these measures focus particularly on comparing broad categories of taxation revenue from a national accounting perspective.
- The data reported in this chapter combine taxation revenues from all levels of government — that is, national, provincial and local governments. Where practicable, information about the split between levels of government is also provided.
The broad conclusions from this comparison are as follows.
- Australia has a low tax burden, both currently and historically. In 2003, Australia had the eighth lowest tax burden of the OECD-30 countries and has typically ranked in the bottom third of countries for the period since 1965.
- Australia’s tax burden as a proportion of GDP is 31.6 per cent. This is below the unweighted OECD-30 average of 36.3 per cent and above the GDP-weighted OECD-30 average of 30.9 per cent.
- Australia’s tax mix is broadly consistent with other countries’, although there are some distinguishing features. Like most other advanced countries, Australia raises the majority of its taxation revenue (60.9 per cent compared with the OECD-30 unweighted average of 62.2 per cent) from direct taxation levied on incomes and payrolls. The remaining 39.1 per cent of Australia’s taxation revenue is derived from indirect taxation — including the goods and services tax, excise and customs duty, and property taxes.
- Australia’s tax burden on individuals and payrolls (14.0 per cent of GDP) is significantly lower than the OECD-30 unweighted average (19.5 per cent) and the average of the OECD-10 countries (16.3 per cent). Ten OECD-30 countries, and three of the OECD-10, have revenues classified as taxation on payrolls and workforce.
- Australia has a relatively high company tax burden. It is the third highest at 5.3 per cent of GDP, compared with the OECD-30 unweighted average of 3.3 per cent and the average for the OECD-10 of 3.4 per cent. However, classification issues make it difficult to draw useful conclusions from these comparisons.
- Australia’s tax mix has a significantly lower reliance on value added and sales taxes (4.3 per cent of GDP) than the OECD-30 unweighted average (6.8 per cent).
- Taken together, Australia raises around 3.4 per cent of GDP in excise and customs duties — in line with the OECD-30 average (3.4 per cent). However, there are several classification issues with customs duty which make it difficult to draw useful conclusions from the data.
- Australia has a relatively greater reliance on immovable property taxes (1.4 per cent of GDP) and transaction taxes (1.6 per cent) than the OECD-30 average (0.9 per cent and 0.6 per cent respectively). Transaction taxes are a significant revenue source for Australia’s state governments.
The standard measure of the aggregate tax burden is total taxation revenue as a proportion of GDP. While not perfect, it is a universally adopted measure, including by the OECD. Difficulties with this measure include:
- in some cases, taxes are levied on bases that may not even be reflected in GDP (for example, capital gains tax on asset price increases and taxes on land values);
- measures of GDP are estimates and they are often revised, whereas taxation revenues have a reasonable degree of certainty;
- Australia has a full accrual accounting system for the collection and reporting of taxation revenues. This is different to most other countries, where the systems are predominantly cash or partial accrual accounting. This difference typically leads to a downward bias in the level of the reported tax burden of other countries, during periods of economic growth, because of the less than full recognition of tax liabilities recognised but not yet collected; and
- there are numerous differences and difficulties in standardising the classification of taxes and the components of GDP across countries.
Notwithstanding all of these issues, tax as a proportion of GDP remains the best and most widely accepted aggregate measure of the tax burden, and is the standard measure reported in this chapter, and throughout the report. Other measures of the tax burden are also noted in this report, where those measures provide supplementary information.
The Australian tax burden has followed the broad trend of growth displayed by most advanced countries, increasing from 27.3 per cent of GDP in 1980 to 31.6 per cent in 2003. The increased tax burden of most countries has been required to finance the increased service levels provided by governments over this period. Australia’s tax burden is relatively low, compared with most OECD countries.
Chart 3.1: The Australian tax burden in perspective
OECD-30, total taxation revenue as a proportion of GDP, 1980-2003
Source: OECD Revenue Statistics, 2005.
In 2003, Australia’s tax burden (31.6 per cent) was lower than the OECD-30 unweighted average (36.3 per cent), and was around the same level as that of the OECD-10 comparator group of countries (32.0 per cent) and the weighted OECD-30 average (30.9 per cent).
- The OECD-30 weighted average is significantly lower than the OECD-30 unweighted average because the United States and Japan, which jointly contribute around half of total OECD GDP, have significantly lower tax burdens than most of the rest of the OECD.
Since 2000, there has been an abrupt and large reversal of trend in the OECD-30 weighted average tax burden (Chart 3.1). This has mostly been driven by large reductions in taxation revenue in the United States and Japan.
In broad terms, the Australian tax burden has always been lower than the OECD-30 weighted average and significantly lower than the unweighted average. The sudden change in the tax burden of the United States and Japan means that, for the first time, the relative position of Australia’s tax burden has changed from being below the OECD-30 weighted average to being slightly higher.
- Since 2000, the tax burden of the United States has been reduced by 4.3 percentage points, from 29.9 per cent of GDP to 25.6 per cent of GDP. In the same period, Japan’s tax burden was reduced by 1.2 percentage points from 26.5 per cent to 25.3 per cent.
Box 3.1: The use of summary statistics: weighted and unweighted averages
Unweighted averages are the simple average of a range of observations. Only unweighted averages are reported in the OECD’s Revenue Statistics — the source of most of the data used in this report. This means that each country’s tax burden is given an equal weight in the average of all OECD countries’ tax burden, regardless of whether that country is Australia, which in 2003 contributed 1.9 per cent of the total GDP of all OECD countries, or the United States, which contributed 36.3 per cent of total GDP.
In comparison, weighted averages scale the tax burden of each country by that country’s contribution to total GDP. On this basis, the tax burden of the United States contributes 36.3 per cent of the average tax burden for the whole OECD, while the tax burden of Australia contributes 1.9 per cent of the average OECD tax burden.
As with most summary statistics, the choice of statistic depends on how it is to be used. The OECD only uses unweighted averages in Revenue Statistics. Unweighted averages best reflect the diversity of experience in the OECD. In contrast, weighted averages may be useful if the observer wants to understand the proportion of economic activity relevant to a particular issue — for example, the rate of growth of OECD GDP is a weighted average.
Both weighted and unweighted averages of OECD countries are presented throughout this chapter, in part, because different readers will prefer to make comparisons using one statistic rather than the other. What this draws out is the difficultly in making definitive statements in international comparisons.
There are a range of other statistical measures of dispersion. For example, there are the median and standard deviation, but these are not used in this report. Instead, charts are the main presentation tool to assist the reader in understanding the varied experiences of OECD countries.
Chart 3.2: The tax burden
OECD-30, total taxation revenue as a proportion of GDP, 2003
Source: OECD Revenue Statistics, 2005.
The average tax burden for the European Union members of the OECD in 2003 was 39.4 per cent — well above the Australian tax burden. However, there is quite a diverse pattern of tax burden within the European Union.
- The Nordic (Sweden, Finland, Norway and Denmark) and European Lowland (Belgium, Luxembourg and the Netherlands) countries typically have higher tax burdens (Sweden had a tax burden of 50.6 per cent) and the Mediterranean and Eastern European countries typically have lower tax burdens (Turkey was 32.8 per cent). Switzerland has the lowest tax burden (29.5 per cent) of all the European Union members of the OECD.
Australia had the eighth lowest tax burden of the OECD-30 in 2003 (Chart 3.2). Of all the OECD countries, only Mexico, Korea, Japan and the United States have a significantly lower tax burden than Australia. Switzerland, Ireland and the Slovak Republic had a marginally lower tax burden than Australia in 2003.
For the period 1965 to 2003, Australia’s tax burden has mostly been in the bottom third of OECD countries (Table 3.1). Australia’s tax burden has typically been lower than that in most of the European countries, the United Kingdom, New Zealand and Canada, but has generally ranked above Japan and the United States.
Ireland is noteworthy. Its tax burden has been dropping rapidly over the last two decades. It ranked as the twelfth highest taxing OECD economy in 1985, yet by 2003 it had the sixth lowest tax burden. The Irish experience is discussed in greater detail in Box 11.1.
Table 3.1: Ranking of OECD countries in descending level of tax burden(a)
Selected years, 1965-2003
- Since 1965, the member countries of the OECD has increased from 24 to 30.
Source: OECD Revenue Statistics, 2005.
As noted in section 3.1.1, the standard measure of the aggregate tax burden is total taxation revenue as a proportion of GDP. There are several other ways of thinking about a country’s tax burden. For example, Chapter 4 provides details of the tax burden of typical types of taxpayers in different circumstances. These tax burdens are expressed in terms of either average or marginal rates of tax paid, or amounts of tax paid in Australian dollars.
Another aggregate measure of the tax burden is to calculate the average level of tax paid by the average person in Australian dollars. This measure is the tax burden per capita. The main deficiency with this measure of tax burden, particularly when compared with taxation revenue as a proportion of GDP, is that it does not account for capacity to pay or the ratio of taxpayers to non-taxpayers (for example, most children and various low income earners).
Chart 3.3: The tax burden per capita(a)
OECD-30, total taxation revenue per capita, 2003
- Calculated using OECD data and IMF purchasing power parities.
Source: Australian Treasury estimates.
On this basis, Australia has a low tax burden when measured as taxation revenue per capita (A$13,834) — slightly below the OECD-10 average of A$15,011. New Zealand ranks lower (A$12,122), and the United States (A$14,738), the United Kingdom (A$15,124) and Canada (A$16,436) are among those countries that rank higher (Chart 3.3).
One of the reasons the United States has a higher taxation revenue per capita than Australia, but a lower taxation revenue as a proportion of GDP, is because it produces more GDP per person than does Australia (this comparison was highlighted in Chapter 3 in respect of all the OECD countries). The higher productivity and higher income of the United States give it greater capacity to raise more taxes than Australia, while still potentially leaving its citizens with more disposable income than is the case for Australia.
While the statutory rate of tax is the headline rate of taxation for each dollar of income or consumption, the effective rate is the average rate of taxation for every dollar of income or consumption. It is the total tax obligation, including all relevant taxes and credits, divided by total income or consumption.
Unlike statutory rates, effective tax rates are not readily observable. Instead, researchers use various methods to measure representative effective tax rates. In making international comparisons, a country’s international ranking can vary considerably depending on the effective tax rate measure adopted. Unfortunately, all effective tax rate measures have significant methodological and/or data problems.
There are several ways to calculate effective tax rates.
- Using tax return data, the effective tax rate reflects the tax payable as a proportion of total (rather than taxable) income or consumption. In this case, the effective tax rate can differ from the statutory rate where taxable income differs from actual income — for example, because of tax offsets. This measure of the effective tax rate is likely to be inflated to some degree because non-compliance is likely to result in observed taxable income being lower than underlying taxable income.
- Hypothetical effective rates can be calculated using stylised modelling of investment, income or consumption. This method is often adopted by researchers, some of which are referred to in this report.
- Using aggregate national accounts data and taxation revenues, the effective tax rate reflects the proportion of taxation revenue to the relevant economic income base. In this case, the effective tax rate can differ from the statutory rate because the taxation revenue might include taxes levied on bases which may not be accurately included in the economic income (for example, capital gains), or because taxable income may differ from economic income — for example, this may be because rates of depreciation are higher or lower than economic depreciation.
Where effective tax rate measures use historical data, inadequate data may complicate the comparison of rates over time and between countries. Hence, robust estimates are not readily available.
Effective tax rates for Australia are reported in Chapter 4 in respect of personal income taxes and Chapter 5 in respect of company income taxes.